This’ll be a bit repetitive, but that’s fine because it’s important, and there’s a tie-in with the AI story which, along with gold’s record run, is all anyone cares about.
Stock prices are like all other prices, which is to say they’re a function of supply and demand. When demand outstrips supply, they go up and vice versa.
The biggest source of demand for US corporate equities is corporations themselves. For better or worse, we’ve created a system of perverse incentives part and parcel of which is the C-suite’s insatiable appetite for it’s own cooking, so to speak.
That flow — the corporate bid — matters, and it matters a lot. Corporates are “the ultimate dip-buyer,” as Birinyi Associates put it a couple of months back, and this year’s a banner year for buybacks.
As the updated figure above reminds you, authorizations in 2025 are running well north of $1 trillion, outstripping any other year on record.
We know what motivates that — greed. I’m just kidding. Except not. Greed’s a big part of it. At least as big a part as greed always is when it comes to explaining why humans do what they do. Executive compensation tends to be equity-linked, the fate of the stock price is bound up with quarterly earnings and one sure-fire way to juice EPS is to reduce the float.
But what funds it? Well, debt in some cases. When you can borrow fixed for a decade at <80bps above Treasurys, it’s tempting to do so and plow the proceeds into buybacks, particularly if you can convince yourself of your own optimistic growth projections.
A better way to fund buybacks — i.e., if you’re not into financial engineering or otherwise not keen to myopically leverage the business — is through free cash flow. That’s a lot of what you’re seeing currently.
“All of that mega-cap tech cash flow generation is allowing for record notional authorized buybacks,” Nomura’s Charlie McElligott remarked. The figure below, which I first used — checks notes — four days ago, points to a potential problem with that.
Increasingly, the Mag7 are plowing their free cash into AI projects and at least when expressed as a percentage of the total, that’s expected to come at the expense of buybacks.
This is yet another reason so many people are fixated on the ROI from what’s expected to be around a trillion in AI capex spending from the hyper-scalers this year and next.
Buybacks, McElligott went on, in the same note, serve as a “latent bid into a trending-higher market” and tend to be “more aggressive into pullbacks.”
Consider the implication: In addition to the mathematical impact on EPS of a lower float, buybacks also “act as a synthetic long gamma shock absorber” for the market. When stocks dip, the corporate bid’s commensurately more aggressive, which arrests pullbacks. In that way, repurchases are a vol dampener.
So, yeah: All that AI spending better be worth it.
So yet another dynamic artificially suppressing vol. What happens if they all get pulled at the same time. Thinking it is possible as they (the myriad dynamics artificially suppressing vol) are all part of the same house of cards? Volmageddon 2.0 or Volmageddon^2 (squared)?
Also, “financial engineering” typically relates to capital structure, but now, with all the circular deals in the AI space, they are financial engineering their P&Ls. What could possibly go wrong?
During our last bout with stagflation–the 1970s–many corporations were paying dividends of around 4.5%. Jack Bogle once said that back then, that’s where half your earnings came from. (Of course, rates were just higher back then in general.) You would think that a stable, well-run company paying close to 5% in dividends would be a sought after investment, but that apparently is just not the case anymore. Tech doesn’t work that way, and AI tech is the story. I invest in some dividend stock ETFs (as part of a retirement income stream), and in our current environment I am lucky to earn just under 4% with little to no price appreciation.
At some point, we should see companies becoming more profitable because they are benefitting from AI, and not just because they are the ones developing it. Maybe someday those companies will see fit to pay back investors through dividends, rather than buybacks and price appreciation (and additional bonuses for their chief officers all around.)
At the same time I am earning steady 7.8% pre-tax equivalent in cash from my insured muni bonds. In the good old days I was trying to build assets when stock prices were dead flat. Any dividend was better than nothing and discount T-bonds in a sharpy falling rate environment were better than everything.
Would expect to see some dispersion between those who have an authorization outstanding versus those who do not (and those whose share count is still growing due to comp).