Buyback Comeback

When it comes to equity demand, there’s no bid quite like the corporate bid.

Buybacks can cushion drawdowns, but happily, corporates aren’t known for being particularly adept at market timing, so they’ll buy at elevated levels too.

In 2022, corporates will be the largest source of net US equity demand, according to Goldman’s forecasts (figure below).

Over the weekend, I talked about household and other “end-user” demand. That’s the more compelling, headline-friendly story, but there’s some (mildly) interesting nuance to the buyback tale.

Obviously, net corporate demand has been skewed in the pandemic era — both sides of the equation were distorted.

In the first half of 2021, corporations were net buyers of just $73 billion of stocks, Goldman’s David Kostin wrote, in his latest, noting that “many buyback programs remained on hold [while] equity issuance hit an all-time high.”

“The equity issuance market is always a case of strike while the iron is hot,” Stifel chief equity strategist Barry Bannister told Bloomberg, in a recent interview. “Overvalued markets are certainly hot.”

But Kostin noted that almost $900 billion in buyback programs have been authorized so far this year. That’s an all-time high (figure below, from Goldman).

Goldman’s buyback desk sees executions increasing 5% from Q3 to a pace of almost $4 billion per trading day this quarter.

The interesting bit is the juxtaposition between decelerating earnings growth and accelerating repurchases. “Earnings growth is typically the most important driver of corporate equity demand, but 2022 will be an exception,” the bank said.

Clearly, earnings growth will cool going forward, but buybacks will normalize on a lag. “In Q2 2021, S&P 500 quarterly earnings were 36% greater than Q4 2019, yet notional executed buybacks were only 8% higher,” Goldman’s Kostin went on to write, adding that while the bank sees profits growing just 2% in 2022, “the modest buyback rebound relative to earnings suggests that buyback growth will far outpace earnings growth” next year.

Again, this doesn’t make for the most compelling reading, but it’s always nice to know that corporates will be buying. Or at least until somebody starts taxing the transactions.