Key points
- Goldman Sachs expects robust earnings growth for big tech companies like Meta, Nvidia, Microsoft and Apple.
- As a result, Goldman expects a 13% year-over-year increase in S&P 500 stock repurchases, totaling $925 billion.
- Share buybacks signal confidence in a company’s future, potentially increasing the value of shares.
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Pay attention to the robust earnings growth of big tech companies like Meta Platforms Inc. NASDAQ: METANvidia Corp. NASDAQ:NVDAMicrosoft Corp. NASDAQ:MSFT and Apple Inc. NASDAQ:AAPL increase share buyback rate this year, says a recent Goldman Sachs report.
Goldman Sachs expects S&P 500 companies to increase share repurchases by 13% year over year, to $925 billion. Analysts at the investment bank had previously forecast a 4% increase in share buybacks, following a 14% decline in 2023.
Analysts added that they expect buybacks to exceed $1 trillion by 2025.
Why is this important for investors?
Share buybacks increase the value of shares
Price appreciation and dividends get most of investors’ attention, but share buybacks increase the value of shares by signaling confidence in the company’s future. They reduce the supply of shares outstanding, which can increase earnings per share.
Buybacks have the potential to drive stock prices higher due to improving fundamentals and increased demand for shares while supply has been reduced.
Additionally, share repurchases are a tax-efficient way to return capital to shareholders without committing to regular dividend payments.
Goldman Sachs’ buyback forecasts were also a nod to continued earnings growth in mega-cap technology and communications services stocks. Analysts expect these stocks to account for a “substantial” percentage of the S&P 500’s buyback growth this year.
Goldman Sachs: Macroeconomic improvements driving forecasts
While Tesla Inc. NASDAQ:TSLA earnings are down and the stock is in trouble, AI stocks like Advanced Micro Devices NASDAQ:AMD and Applied Materials Inc. NASDAQ: AMAT they moved into leadership.
In their report, Goldman Sachs analysts wrote: “Improvements in the broader macro environment seen since the fall, such as the decline in Treasury yields, also help guide our forecast upgrade.”
Goldman previously raised its S&P 500 earnings estimate for 2024 by 8% to $241 per share. It is expected to rise another 6% next year, to $256 per share.
Headwinds for an increase in buybacks
However, frothy valuations and uncertainty over the upcoming US presidential election could dampen buybacks, according to Goldman Sachs analyst Cormac Conners.
He added that current regulatory filings show the so-called Magnificent Seven stocks have authorized a total of $215 billion in share repurchases for this year, up 30% from a year ago.
Dividends or buybacks?
If more large technology and communications services companies start paying dividends, that could curtail buyback plans. For example, a recently announced 50 cents per share dividend from Meta Platform indicates management’s confidence in the company’s future earnings.
If more high-growth companies decide to pay dividends, that could reduce their enthusiasm for buybacks.
Apple and Microsoft pay dividends, but Nvidia, Amazon.com Inc. NASDAQ: AMZNTesla and Alphabet Inc. NASDAQ:GOOGL Not. Analysts say Alphabet and Amazon are among the stocks likely to pay a dividend.
Fast-growing technology companies often prioritize reinvesting profits in research, development and expansion over paying dividends. Taking Nvidia as an example, it makes sense that the company would want to increase its AI chip manufacturing capabilities right now, choosing to return capital to shareholders in the form of price appreciation.
Technicians often retain earnings
This focus on growth and new opportunities helps rapidly evolving companies like Nvidia maintain a competitive edge.
Additionally, technology companies may prefer to maintain earnings to provide flexibility, for example by financing acquisitions or investing in innovation. Technologies like Alphabet, Apple, and Microsoft are known as money hoarders.
In addition to providing options, liquidity also provides a cushion amid market and economic uncertainties.
It’s not just techies who have recently announced share buybacks; data compiled by MarketBeat shows companies across multiple industries saying they would buy back shares, signaling confidence in the strength of these companies’ earnings.
Over the past month, companies including Ulta Beauty Inc. NASDAQ:ULTAArcher-Daniels-Midland Co. NYSE:ADMRoss Stores Inc. NASDAQ: ROSTTidewater Inc. NYSE:TDWTJX Companies Inc. New York Stock Exchange: TJX and eBay Inc. NASDAQ: EBAY announced share buyback programs.
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