Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / Why This Bull Market Loves Buybacks Again
Transcript
- Lucas: So the S&P 500 is sitting at 7,786 as of Friday's close, up about 0.4 percent on the week. And underneath that headline number, there's a quieter story that I think is worth unpacking: stock buybacks are having a moment. Companies are repurchasing their own shares at a pace we haven't seen since the pre-covid boom. Luna: I've noticed that too. It feels like every other earnings call this quarter had a 'we're increasing our buyback authorization' line. But is that actually a bullish signal, or are companies just out of better ideas? Lucas: Both, honestly. But let's start with the data. According to the latest S&P Dow Jones Indices numbers, buybacks in the second quarter of 2026 are tracking about 18 percent higher year-over-year. The tech sector is leading the way, and mega-caps like Apple, Alphabet, and Meta have been particularly aggressive. Alphabet, for instance, authorized another $70 billion in May, on top of the $60 billion they did last year. Luna: Right, and that's on top of the news that Berkshire Hathaway just boosted Alphabet to a top three holding. So there's a lot of conviction in these names, not just from management but from value investors too. Lucas: Exactly. And the macro backdrop helps. The Fed has held the funds rate at 3.63 percent since July, and with inflation cooling, the ten-year Treasury is hovering around 3.9 percent. That means the cost of debt is still low enough that companies can borrow to fund buybacks, even if they don't have the cash on hand. But the real driver here is confidence. Management teams are signaling that they think their stock is undervalued relative to future cash flows. Luna: But isn't that the classic argument? 'We're buying because we're undervalued.' Sometimes that's just management trying to prop up the stock price when they have nothing else to say. Lucas: That's the cynical take, and there's truth to it. But the nuance is in how they're funding it and what it does to the balance sheet. A buyback that's funded by operating cash flow and leaves the balance sheet healthy is different from one that's funded by debt and starves R&D. Lucas: Take Apple as an example. They've been buying back stock for years, and their net cash position is still enormous. They're generating so much free cash flow that the buyback is almost a rounding error. That's a sign of strength. Conversely, there's a mid-cap software company I've been watching that just announced a $500 million buyback while their debt load has doubled in two years. That's a red flag. Luna: And that's the kind of divergence that's becoming more common in this bull market. We've talked a lot about how the rally is selective, and buybacks are another way that selectivity shows up. Strong companies are doing buybacks that create value; weaker ones are doing them to mask dilution or prop up earnings per share. Lucas: Right. And that's why the earnings per share math matters. A buyback mechanically reduces the share count, so even if net income is flat, EPS goes up. That can fool investors who only look at the headline. But the real question is whether the buyback is being done at a price that's below intrinsic value. Luna: So how do you tell the difference in practice? I mean, you can't read management's mind. Lucas: You can look at the pattern. If the buyback is consistent through market cycles, and the company is buying more when the stock is down, that's a good sign. If they're buying aggressively at all-time highs and slowing down when the stock drops, that's a bad sign. There's actually a study from the University of Chicago that found companies that buy back more when their stock is undervalued tend to outperform. Lucas: And then there's the opportunity cost angle. Look at what's happening in AI infrastructure. Microsoft and Amazon are pouring billions into data centers to fund the AI buildout. They're also buying back stock. So the question is: are they allocating capital to the highest-return projects, or are they just returning cash to shareholders because they don't have enough good ideas? Luna: That's the tension. And it's not just about buybacks, it's about the whole capital allocation picture. If you're buying back stock while your capex is exploding, you might be stretching yourself thin. But if you're generating so much cash that you can do both, then it's not a zero-sum game. Lucas: And that's exactly what's happening with the mega-caps. Their free cash flow is so enormous that they can fund the AI buildout, pay dividends, and still have billions left over for buybacks. That's why I think the buyback boom is a sign of health at the top of the market, even if it's masking weakness elsewhere. Lucas: You know, this conversation reminds me of why we do this show. It's not just about tracking the numbers, it's about understanding the forces that move them. And if you've found that kind of insight valuable, well, there's a small way you can help us keep doing this. Luna: Yeah, we've never really asked for much, but listener support is what keeps Bull Market Conversations ad-free and independent. If you've gotten something out of our episodes, you can buy us a coffee at buy me a coffee dot com slash fexingo. Lucas: It genuinely helps us keep the lights on and the research flowing. But no pressure, we're glad you're here either way. So, back to buybacks — I want to talk about the impact on the broader market. Lucas: Because here's the thing: buybacks are a primary driver of demand for stocks. When a company buys back its own shares, that's a buyer in the market, and it supports the price. In fact, over the past decade, net buybacks have accounted for a significant portion of the S&P 500's total return, especially in years when the market was flat. Luna: So in a way, buybacks are like a floor under the market. If companies are confident enough to buy their own stock, that sends a message to other investors. Lucas: Exactly. And that's why the recent data is so important. If buybacks are accelerating as the S&P sits at a record high, it suggests that corporate insiders still see value. And historically, that's been a decent leading indicator for the next six to twelve months. Luna: But isn't there a risk that they're buying at the top? I mean, we're at 7,786, which is up a lot from the March 2020 lows. Could this be the peak of the buyback cycle? Lucas: That's a legitimate concern. Buybacks are often procyclical — companies buy more when the market is high and less when it's low, which is the opposite of what you'd want from a value perspective. But the current environment is a bit different because companies are sitting on so much cash. The cash hoard is still near record levels, so they have the firepower to keep buying. Lucas: And there's also the political dimension. We've seen proposals in Washington to tax buybacks more heavily, and some of that has been quiet lately, but it's still a risk. If the tax rate on buybacks goes up, that could change the calculus. Luna: Right, there was a 1 percent excise tax that was introduced a few years ago, and there were talks of raising it. That hasn't materialized, but it's something to keep in mind. Lucas: Exactly. And for now, the buyback boom is a sign of confidence. But as with everything in this market, you have to be selective. Not all buybacks are created equal, and the ones that matter are the ones that are funded by real cash flow and executed at rational prices. Luna: So if you're an investor, how do you actually evaluate a company's buyback program? What's the first thing you look at? Lucas: I'd start with the free cash flow yield. If a company is buying back stock at a rate that is less than or equal to its free cash flow, that's sustainable. If it's borrowing to buy back, that's a warning sign. And of course, look at the valuation. If the price to earnings ratio is above the historical average, you have to ask whether the buyback is creating value or just reducing share count. Luna: And that ties back to the mid-cap software example you mentioned. What happened there? You said they doubled their debt. Did the market punish them? Lucas: Ironically, their stock actually went up on the announcement. But if you look at the long-term price action, they've lagged their peers. The buyback didn't create lasting value because the underlying business wasn't generating enough cash to justify it. Investors eventually figured it out. Luna: That's a good reminder that the market can be fooled in the short term, but over time, fundamentals win out. Lucas: And that's really the takeaway for today. Buybacks are back in vogue, and they're a powerful force in this bull market. But they're not a one-size-fits-all signal. You have to dig into the details. Lucas: So as we head into the fall, I'll be watching whether the buyback pace continues, especially in the tech sector, and whether we start to see more mid-cap companies follow suit. If they do, and they fund it properly, that could be a sign that the bull market has more room to run. If not, it might be a sign that we're closer to the top than we think. Luna: And that's the kind of nuance we like to bring to the conversation. Thanks for joining us on this episode of Bull Market Conversations.