Be cautious! Share Buybacks — The bull market's biggest driver may slow

A slowdown in share buybacks would be the biggest risk for investors betting on continued gains in U.S. stocks.

Over the past 10 years, share repurchases have been an important support for the S&P 500's returns: 40.5% share repurchases, 21% p/E ratio, 31.4% earnings per share and 7.1% dividends.

According to S&P Dow Jones indices, US Q3 share buybacks have set a record, while capital spending remains below pre-pandemic levels. Share buybacks by S&P 500 companies more than doubled from a year ago to an all-time high of $234.6bn, and THE Q4 is expected to break another record.

Capital expenditure rose 21 percent to $189 billion in the same period, but was still 3 percent lower than in the last three months of 2019, before the pandemic brought economic growth to a halt.

A combination of US fiscal support, low borrowing costs due to low interest rates and uncertainty about the outlook raised by the pandemic are seen as driving up the buyback scale.

Taking history as a guide, the Fed tightened monetary policy slowed share buybacks and reduced stock returns. Stocks did rise 7 per cent after the Fed raised rates in 1999, but fell nearly 50 per cent over the next two years after the Fed ended raising rates in 2000.