U.S. Stock Valuations Being Artificially Boosted by Share Repurchases
In the world of finance, the third quarter of 2021 is shaping up to be a significant one. U.S. corporations have promised to repurchase around $984 billion of their own shares by early August, a level not seen since Birinyi Associates' database began in 1982. This massive buyback wave is expected to boost collective earnings in the S&P 500, which are forecasted to grow by 12.7% to $563 billion.
J.P. Morgan, Bank of America, and Morgan Stanley have announced or expanded their buyback programs following the positive results of the 2025 stress test. However, analysts view buybacks at current valuation levels for companies like Apple as an inefficient allocation of liquidity.
Tech giants, in particular, have been increasing their capital expenditures on data centers and AI applications, a trend that became more evident in their recent earnings reports. Apple, for instance, has a buyback program worth $100 billion and sits on liquid assets and securities worth $55.37 billion.
The S&P 500 is currently trading at over 22 times forward earnings, well above the 10-year average. This high valuation has led some analysts to suggest that Washington's economic policy has led companies to prefer using funds for share buybacks instead of long-term investments. However, market turbulence could force companies to hold onto their cash and potentially cancel buyback programs.
Goldman Sachs, on the other hand, warns of a significant correction in the S&P 500 due to the headwind from tariffs. The political pressure on the Federal Reserve to lower interest rates and the fiscal expansion from President Donald Trump's tax package, along with massive investments in artificial intelligence (AI), are contributing to the risk of economic overheating. Analysts at Wolfe Research believe the current asset prices are a sign to take profits in the short term due to this risk.
LPL Financial suggests that these record investments mean additional revenues for companies along the supply chain, supporting productivity gains and higher margins for U.S. corporations overall. Completed buybacks this year could reach over $1.1 trillion, another record.
ExxonMobil could return nearly $37 billion to shareholders in 2025 through buybacks and dividends. However, investors in the oil sector traditionally react unfavorably to debt-financed share buybacks. ExxonMobil expects a free cash flow of $29 billion for 2025 and has cash and cash equivalents of $14.35 billion, with another $1.36 billion committed to certain projects.
Meanwhile, the "Magnificent Seven" companies, excluding Alphabet, are trading at valuations above the S&P 500 average, with Tesla trading at over 150 times forward earnings. Alphabet, on the other hand, has announced a $70 billion share buyback program and had cash and marketable securities totaling $95.15 billion.
Sam Altman, CEO of OpenAI, acknowledged last Friday that investors overall are overly enthusiastic about AI. Larry Fink, CEO of Blackrock, has expressed concerns about buybacks taking away room for future investments.
US oil companies like ExxonMobil have announced future buyback programs totaling approximately $30 billion to return value to shareholders, with reserves valued at around $50 billion in net present value and committed projects worth about $20 billion.
In the second quarter of 2021, earnings in the S&P 500 grew by 11.8% from a year ago, marking the third consecutive quarter of double-digit growth. As the market continues to evolve, it will be interesting to see how these trends unfold in the coming months.
