The US stock market bull run has been raging for a decade. But what’s driving this record-breaking rally? It’s not real investors, according to new Deutsche Bank metrics. It’s stock buybacks.
Latest data, shared by The Welt’s Holger Schaepitz, shows that the US companies are getting high on their own supply . Corporate share buyback programs – whereby companies purchase their own shares – are powering this record-breaking stock market run.
The biggest driver of the rally in the stock market since 2009? Buybacks.
As you can see in the chart above, ‘non-financial corporations’ account for more cumulative US equity purchases than any other category. Almost $4 trillion in total value since 2009. In other words, US companies like Apple, Microsoft etc. are buying more equities than foreign and domestic investors. And they’re buying their own shares.
“Since 2012, Apple has been buying back shares at the extraordinary rate of $10 billion per quarter. A year ago, it picked up the pace to around $20 billion per quarter” – Apple Insider .
Apple isn’t alone. Microsoft just announced a $40 billion share buyback program. Earlier this year, Target pledged to buy $5 billion of its own stock. Procter & Gamble and Wells Fargo routinely buy their own shares.
Simply, to inflate the value of their stock price.
Let’s say Apple buys 100 million shares. There are now fewer AAPL shares on the open market, so each one is effectively worth more. As Investopedia explains :
A share buyback reduces the number of outstanding shares, which increases both the demand for the shares and the price.
Companies call it “returning value to shareholders.”
Looking at the Deutsche Bank chart above, it’s clear to see that domestic investors, like pension funds, are actually reducing their exposure to stocks. Household and foreign buyers are almost flat across the decade.
In other words, true investors aren’t buying at any strong pace. Meanwhile, real fundamentals are declining. Corporate America entered an earnings recession this year, with three quarters of back-to-back decline. But you wouldn’t know it from the stock market valuations.
An argument can be made that stock buybacks are therefore distorting the true value of the US stock market.
If the bull run is driven primarily by stock buybacks, we may be heading towards a rude awakening.
The pace of buybacks declined rapidly in 2019. Goldman Sachs issued a report saying the rate was “plummeting,” down 15% this year. A further 5% decline in stock repurchasing is expected in 2020.
The tide is going out on stock buybacks, a phenomenon that has pumped the US equity market to record highs. And what happens when the corporations stop buying?