While many analysts wanted to attribute the divergence in US stocks during the first three months of this year to strong economic data, the fiscal stimulus unleashed by Trump or stronger-than-expected corporate earnings, as analysts at Nomura (including cross-asset strategist Charlie McElligot) and Deutsche Bank have argued, when it comes to factors undergirding the market rally, buybacks trump growth "divergence".
And while equity-market performance in late September and October - when corporations entered a buyback "blackout" period - has largely vindicated their analysis, in case anyone still doubts the crucial role of the corporate bid, the Financial Times offered yet another piece of evidence in a story published in Tuesday's paper when it revealed the full magnitude of tech company buybacks fueled by the Trump tax cuts during the first three quarters of 2018. Out of all the money repatriated by US companies thanks to the Trump tax cuts, US companies have spent a staggering sum on buybacks, and a comparatively paltry amount on boosting capex spending and reinvestment (the kind of corporate spending that helps drive economic growth).
Per the FT, the five US tech companies with the largest cash piles spent more than $115 billion on buybacks during the first three quarters of the year, nearly double what they spent during the entirety of last year. This is the latest sign that, while Trump sold his tax cuts as a boon for working Americans, investors have reaped most of the benefits to date (though to be fair, the companies did boost their capital spend by a combined $42 billion). The tech firms also spent some of the repatirated cash paying down debt, freeing up more money to spend on buybacks in the future.
"Most companies are using cash to buy back stock and make acquisitions, rather than invest in new facilities," said Walter Price, a tech investment manager at Allianz. "I think this is good for shareholders and management." Tech companies were also paying down debt they took on in previous years to buy back shares, he added.
These companies (Apple in particular) had been sitting on massive cash piles that had been stashed off-shore to avoid paying US taxes when the money was repatriated.
Take Apple, for example: While the tech giant spent $14.5 billion on capex during the first three quarters of 2018 (after promising to reinvest some $350 billion in tax-cut enabled repatriated cash within the US), its buyback spending soared to $62.6 billion - nearly three times the prior-year period. To be sure, some of the repatriated money has likely been earmarked for capital spending. However, this spending will likely take longer to plan and execute.
"There’s a strong correlation between tax reform and capital spending," added Youssef Squali, an internet analyst at SunTrust Robinson Humphrey, pointing at Google and Facebook, which plan to spend a combined $37bn between them this year, up from just under $21bn in 2017.
Notably, the growth in buybacks hasn't been confined to tech alone: US corporate buybacks rose 44% during the first nine months of 2018.
Meanwhile, share buybacks have risen 44 per cent so far this year, according to Goldman Sachs, which estimates that buybacks will climb another 22 per cent in 2019. Just 25 companies accounted for 99 per cent of the growth in buybacks this year, the bank found, underscoring the outsized influence of tech companies’ use of cash.
But while the buybacks led tech stocks to outperform on the way up, like the old saying goes: The bigger they are, the harder they fall.