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Today we will discuss big stock buybacks and their impact on the financial markets, particularly on Wall Street. Stock buybacks, or repurchasing shares by a company, is a widespread practice in the United States that has gained significant momentum in recent months and weeks. In my opinion, this practice is distorting the performance of the world’s leading stock index.
Companies have been using buybacks to reduce the number of outstanding shares, effectively taking those shares off the market. When a company announces a buyback plan, the number of shares available for purchase decreases, leading to deflation in the quantity of shares that can be bought. This is the opposite of a capital increase when the number of shares in circulation increases.
Shareholders who owned shares before the buyback plan benefit, as the shares become rarer compared to the total number of shares in circulation.
Several companies have recently announced major buyback plans, including Apple with a $90 billion plan, Alphabet (Google’s parent company) with a $70 billion plan, and Meta Platforms (formerly Facebook) with a $40 billion plan. In total, these plans amount to around $200 billion in stock repurchases.
The impact of these buybacks can be seen when comparing the performance of the S&P 500 index to an equal-weighted index where all stocks have the same impact on the index’s performance. Since mid-March, there has been a divergence between the two indices, with the S&P 500 outperforming the equal-weighted index. This is due, in part, to the buybacks from large companies with high market capitalizations, such as Apple, Alphabet, and Meta Platforms, which have a more significant impact on the S&P 500’s performance.
These buybacks can make it more challenging for investors to take a bearish position on these stocks, as the companies’ ongoing share repurchases can absorb attempts to short-sell the stock. Furthermore, the buybacks may provide artificial support for these stocks’ prices, as the companies use their substantial liquidity to sustain or boost their share prices.
It is crucial for investors to monitor buyback activities closely, as these practices can impact the market dynamics and valuations of individual stocks.
