The amount of corporate buybacks the market has seen over the past quarter has dwindled by 18% compared to last quarter, a fact that Goldman Sachs (NYSE: GS) warns could be harmful for a bull market.
Second quarter data showed that S&P 500 (SPY) share buybacks totaled $161 billion, which is 17% down from last year. In 2019 overall, total buybacks will drop 15% to $710 billion, and in 2020 Goldman predicts a 5% decline to $675 billion.
This drop is concerning because repurchasing shares means that a firm can reduce its shares outstanding, which factors into the stock price calculation in the denominator. Thus, buybacks can have the effect of boosting the stock price and lifts earnings per share figures. Less of these implies we are heading into a bear market and companies have lower buying power.
"Companies spend less cash when policy uncertainty is high. During August, global economic policy uncertainty registered the highest level in at least 20 years. Historically, growth in aggregate S&P 500 cash spending has been weaker during periods of high policy uncertainty. The combination of an ongoing trade conflict and next year's U.S. presidential election will likely result in lingering uncertainty," Goldman's David Kostin wrote.
There is also a political aspect to this, as companies have tightened their coffers not only in light of tariff threats, but also, as a result of presidential candidates such as Bernie Sanders critiquing the buyback practice for widening the wealth gap and diverting resources away from workers.
"The uncertainty surrounding the outcome of the 2020 U.S. presidential election and its potential implications for policy will likely lead corporate managers to adopt a wait-and-see approach to cash spending," said Goldman strategists in a note.
That said, the most buyback momentum currently stems from large companies that can take advantage of their scale. These include Apple (NASDAQ: AAPL), Bank of America (NYSE: BAC) and JP Morgan (NYSE: JPM), while the top 20 stocks accounted for half of the total buybacks of the S&P 500 companies.