S&P 500 Companies Set to Surge Past $1 Trillion in Stock Buybacks by 2025, Driven by Tech Giants and Economic Optimism

S&P 500 Companies Set to Surge Past $1 Trillion in Stock Buybacks by 2025, Driven by Tech Giants and Economic Optimism 

Goldman Sachs analysts predict that S&P 500 companies will purchase $925 billion worth of their own stocks in 2024, with the amount surpassing $1 trillion by 2025. The surge in buybacks is attributed to strong earnings from major tech companies and a potential resolution of political uncertainties surrounding the US presidential elections.

The analysts mentioned that they have revised their forecast upwards for both 2024 and 2025, expecting buybacks to grow by 13% year-on-year in 2024 and by 16% in 2025. They anticipate that solid earnings growth, particularly from large tech firms, will be the main driver behind the increase in buybacks.

This surge follows a 14% decline in buybacks in 2023, which was the second-largest drop since the Global Financial Crisis. Improved macroeconomic conditions and better-than-expected earnings from mega-cap tech companies led to the upgrade of Goldman Sachs' forecasts for both years.

However, elevated valuations and policy uncertainties are expected to hinder buyback growth in 2024. Management teams may be hesitant to allocate cash to buybacks when stock prices are high, and the upcoming US elections could increase policy uncertainty, prompting companies to delay significant buyback increases until 2025.

Despite these challenges, improving profit growth and expectations of an interest rate cut from the Federal Reserve are fueling optimism among investors, pushing the S&P 500 to record highs. This positive environment is anticipated to propel S&P 500 buybacks above $1 trillion for the first time next year.

The bulk of these buybacks will likely come from big tech companies, such as Apple, Meta Platforms, Alphabet, Microsoft, Tesla, NVIDIA, and Amazon. These companies have already authorized a significant amount of stock buybacks for this year, driven by strong revenue growth and a focus on improving operating efficiency.

However, the analysts note that if these companies see attractive investment opportunities beyond their current spending on capital expenditures and research and development, they may limit the growth of buyback programs to fund these investments.

President Biden's proposal to triple the buyback tax on corporations during the State of the Union address could also impact buyback strategies, potentially directing more cash towards workers and factories instead of shareholders.

Finally, Bloomberg macro strategist Simon White suggests that the market may be entering a "topping phase," highlighting the importance of continued buybacks in sustaining market momentum.