Talking Points:

  • US stock markets are doing pretty well at first glance
  • However much of their pep is down to enormous, multibillion dollar share buybacks
  • These pose some worrying questions for the bulls

DailyFX Analysts have made their fundamental and technical forecasts for the third quarter, across a range of widely traded assets. Check them out here.

US Stock markets remain on an upward trajectory as they head into the year’s second quarter, but the reasons for that may not be altogether cheering for the bulls.

Buybacks and Dividend Payouts Have Ballooned

Corporate share buybacks are soaring to historic levels. According to CNBC, US companies bought back $433.6 billion of their own stock in the second quarter, annihilating utterly the previous record of $242 billion. Fully 31 firms have offered buybacks of more than a billion dollars each over the period, a period in which, never forget, other investors dumped a record $23 billion in stock-focused funds.

The financial sector is of course well in on the action, with many huge names proposing buybacks and increased dividend payouts in the aftermath of the Federal Reserve’s latest round of bank stress tests. The likes of JP Morgan, Wells Fargo, Citigroup and American Express all angling to take multiple billions of their own equity off the street. Wells Fargo proposes to buy no less than $24.7 billion.

Can’t Companies Think of Anything Better To Do in A Thriving Economy?

Now, buybacks are not intrinsically bad (or good) things. But it is perhaps surprising that, in an economy performing as well as the US ostensibly is, companies can’t find more enticing and exciting things to do with their piles of cash. Dividends are growing sharply too, with companies returning more and more to doubtless delighted shareholders.

However a focus on buybacks rather than, say, capital expenditure, suggests at least a degree of worry that the best growth of the current cycle may now be behind us, and that the seemingly endless precession of trade spat headlines between the US, China and Europe is causing companies to draw in their horns.

So, while stocks all over the place seem to be in rude health as they head into 2018’s second half, it’s crucial to bear in mind that corporate America is the author of its own share prices’ altitude to an extent never seen before. That’s surely a sobering thought for the Fourth Of July.

US Stocks' Altitude Owes Nearly Everything To Rampant Buybacks

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--- Written by David Cottle, DailyFX Research

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