This isn’t well understood among a lot of “everyday investors” (whatever that means), but stock prices, like all prices, are determined in no small part by supply and demand.
When supply outstrips demand, prices will be pressured lower. When demand exceeds supply, prices will be biased to the upside.
In the US, buybacks aren’t just another bid under stocks. They’re the largest source of domestic equity demand. Perennially. That is: Corporates themselves are the most important buyers of corporate equities.
Some would (and do) argue that’s absurd, or anyway not ideal. It’s part and parcel of the perverse incentives regime at the heart of shareholder capitalism. The interplay with stock-based executive compensation raises questions about the extent to which management teams will be inclined to shrink the float even when there are more productive options for cash usage.
But that’s a normative discussion, and I’ll leave it for another time. The point here is just that between i) the corporate bid and ii) mechanical buying from systematic strats (“the robots,” so to speak) into the post-April 9 tariff “pause” vol crush, demand for equities is dominating supply.
The figure on the left, below, from Deutsche Bank, gives you a sense of the support from buybacks.
The figure on the right shows you how systematic investor cohorts (e.g., vol-control strats, which dial their exposure up as trailing realized vol resets lower) have re-allocated since the “elevator down” purge catalyzed by the “Liberation Day” vol shock.
“The demand-supply backdrop for US equities remains robust, with a key pillar being solid buybacks, with no signs during Q1 earnings calls of corporates going into the bunker,” Deutsche’s Parag Thatte and Binky Chadha wrote, adding that management commentary “points to companies continuing to favor buybacks.” The bank sees gross repurchases clocking in at $1.1 trillion for 2025.
As far as systematics, they noted that the April “shock” days are still dropping out of the three-month realized vol lookback, which ostensibly means there’s more scope for vol-control to add equity exposure assuming no new shocks. CTA Trend positioning, they went on, “will also continue to move higher absent a meaningful selloff.”
Currently, the bank’s composite measure of systematic equity positioning (it rolls up vol control, CTAs and risk parity) sits in just the 27%ile. For discretionary inventors, it’s a middling ~40%ile. So, as long as things stay a semblance of calm, there’s ample room for positioning to get more aggressive, both among the machines and carbon-based investors.
If I were fond of cheap punchlines, I’d insert a generic “What could go wrong?” joke with a Fordo reference.
“What could go wrong?” A TACO Bell crunch?
Fordo is not the only “go wrong” reference. Looking at 90 day data – which seems to be the rage – tariff-man Trump and his advisor mentally unbalanced Navarro (the modern day Grigori Rasputin) are an equal force driving the U.S. to this national (global) catastrophe.
By the way H-man. That is by far the best analysis that I have seen of the equity maket’s current positioning. The wall is very close and our systems are very fast and on a hair trigger,
I’ve finally started to see commentaries which touch on the market internals (as I call them). It helps to explain the resilience of share prices even in the face of questionable earnings growth potential and a suboptimal political landscape.
It surprised me how few readers cared to comment on this well-presented analysis.
I looked up the amount of gross proceeds from IPOs, in order to compare gross proceeds to buybacks for publicly held companies in the US. I don’t know if I found the correct data (I attached what I found- see aggregate proceeds in the last column of Table 1), however, if this is correct, then the aggregate proceeds for 1980- 2024 were $1.2T. 2020-2024 were each $119B, $7B, $12B and $20B, respectively.
So buybacks appear to be exponentially higher than gross proceeds to issuers. Considering the amount of USDs created during the period 2020-2025ytd, this further confirms that the supply is shrinking vs. increased demand due to increased production of USDs.
No wonder demand is far outpacing supply and PEs are increasing. Buy and hold with this dynamic seems to be a “no brainer”.
https://site.warrington.ufl.edu/ritter/files/IPO-Statistics.pdf
In our new world, corporate earnings and, especially, cash flow are only relevant as suppliers the of funds needed to buy back shares.
Only a few years ago, interest rates were so low that companies did not need to reduce buybacks if they could access the credit markets. Borrowing to fund buybacks often made sense, at least to corporate executives.
With borrowing rates so much higher now, I wonder if earnings will become more relevant in this context? It might reduce the cushion we’ve seen when stock prices drop if the trigger was something which threatens earnings and cashflow growth.
Isn’t protecting corporate earnings one of the Federal Reserve’s mandates? 🙂