Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / Why the Bull Market Is Loving Buybacks Again
Transcript
- Lucas: So the S&P 500 is sitting at seven thousand six hundred seventy-one, down about half a percent on the week, but the Dow just hit a record close at fifty-three thousand four hundred ninety-four. And in the middle of all this, companies are buying back their own stock at a pace we haven't seen in years. Luna: That's a striking divergence. The Dow at a record while the broader index is slightly down. What do you make of that? Lucas: Well, part of it is that the Dow is heavily weighted toward blue-chip companies with massive buyback programs — think JPMorgan, Apple, those kinds of names. When they're aggressively repurchasing shares, it mechanically supports the index. But the real story is the scale of buybacks overall. We're seeing companies allocate more cash to repurchases than at any point since the pre-pandemic boom. Luna: And that's happening even as GDP growth slows to one point five percent annualized. Isn't that a bit contradictory? Lucas: It seems counterintuitive, but it's actually a rational response. When organic growth opportunities are scarce — and one point five percent real GDP growth is certainly that — companies often choose to return cash to shareholders via buybacks rather than invest in projects with uncertain returns. It's a signal that management believes the stock is undervalued or at least that they can't find better uses for the cash. Luna: Right, and that's a classic 'cash is king' moment. But aren't there risks to this strategy? I mean, we've seen companies get burned by buying at the top. Lucas: There's definitely a timing risk. But the bigger concern is how they're funding these buybacks. A lot of companies are using debt to repurchase shares, which boosts earnings per share in the short term but increases leverage. We saw this play out poorly in the last downturn. The bull market is loving buybacks now, but that hidden leverage could bite if we hit a recession. Luna: So is this a sign of confidence or a lack of imagination? I mean, if you can't find good investments, maybe you should give the money back to shareholders — but isn't that just admitting you don't know what to do with it? Lucas: That's the crux of it. On the one hand, buybacks are a disciplined way to return excess cash. On the other, they can be a mask for a lack of growth pipeline. And in this bull market, we're seeing a split: mega-cap tech companies with huge cash piles are doing massive buybacks, while smaller companies are more cautious. That's why the Russell two thousand is lagging, down nearly a percent on the week. Luna: So it's a haves and have-nots situation again. The big players are using buybacks to prop up their EPS, but the smaller names aren't participating. Lucas: Exactly. And that's why the market's reaction is selective. Take a company like CrowdStrike, which is down seven and a half percent this week — that's not a buyback story, that's a fundamental concern. Meanwhile, Shopify is up five percent, partly on strong fundamentals but also because there's speculation they might initiate a buyback program soon. Luna: Interesting. So the market is pricing in potential buybacks before they even happen. That's a new dynamic. Lucas: It is. And it creates a feedback loop: companies see their stock rise on buyback announcements, so they do more buybacks, which pushes the stock higher, which makes the buyback look even smarter. But we have to remember that this is a short-term boost. Long-term, buybacks don't create value if the underlying business isn't growing. Luna: And speaking of long-term, what does this say about the overall health of the bull market? Are we in the late innings because companies are resorting to financial engineering? Lucas: Some would argue that. But look at the data: buybacks as a percentage of market cap are still below the peaks of the late two thousands. And we're seeing buybacks across a broad range of sectors, not just tech. Financials, industrials, even consumer staples. That suggests it's not just a last-ditch effort, but a widespread strategy for managing cash. Luna: So what should the average investor take away from this? Should they be excited about buybacks or wary? Lucas: It's nuanced. Buybacks can be a good sign — they often indicate that management is confident in cash flow. But you also want to see that the company is investing in growth. If a company is spending all its cash on buybacks and has rising debt, that's a red flag. I'd look for companies that balance buybacks with reasonable capex and R&D. Luna: And with the Fed holding rates steady at three point six three percent, borrowing costs are still manageable. That could keep the buyback trend going for a while. Lucas: Right, as long as rates don't spike, companies will keep taking advantage of cheap debt to repurchase shares. But if we see a shift in Fed policy, that could change quickly. For now, though, buybacks are a major force keeping this bull market alive. Luna: And that's something our listeners might want to consider in their own portfolios. Like, if you're invested in an index fund, you're automatically benefiting from these buybacks because they boost EPS. Lucas: Absolutely. And that's one of the quiet engines of this bull market — even if GDP growth is anemic, earnings per share growth is being propped up by financial engineering. It's a double-edged sword, but for now, it's working. Luna: I suppose that's a good thing for stock prices, but it does make me wonder how sustainable it is. I mean, you can't just buy back shares forever. Lucas: No, you can't. Eventually, companies run out of cash or hit leverage limits. But in the meantime, it's creating a nice tailwind. And that's why you're seeing record highs in the Dow even as the economy slows. Luna: It's almost like the market is living in its own world, separate from the real economy. Which brings me to something I've been thinking about — how do we, as investors, make sense of this disconnect? Lucas: That's a great question. I think the key is to focus on the fundamentals of the companies you own. Are they generating real cash flow? Are they paying down debt or increasing it? Buybacks can be a distraction if you're not looking at the bigger picture. But if a company is buying back stock while also growing revenue and maintaining a healthy balance sheet, that's a positive signal. Luna: And speaking of healthy balance sheets, do you think the recent volatility in some of the high-growth names — like the ones down this week — is a sign that the market is starting to discriminate more? Lucas: I think so. We're seeing a rotation away from some of the high-flying names that led the rally earlier. Companies like Datadog and Cloudflare are down three to five percent this week, even though they're still up big on the year. That suggests investors are getting more selective, which is actually healthy for the long-term bull market. Luna: So it's not a sign of a bubble bursting, but more of a maturation. The market is starting to separate the wheat from the chaff. Lucas: Exactly. And that's where buybacks come in again. Companies that are doing buybacks are often seen as more disciplined, which can attract investors looking for stability in a choppy market. It's a virtuous cycle, at least until it's not. Luna: Well, I'm glad we have this show to help us make sense of it all. It's easy to get caught up in the day-to-day noise. Lucas: And that's the thing — our listeners are smart, they want to understand the mechanics behind the moves. And we're able to do this because of their support. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's what funds making this many episodes. Luna: Yeah, it really does. We keep the show ad-free and focused on the substance, and that's only possible because of that small group. So if you find value in what we do, consider joining them. Lucas: Anyway, back to buybacks. I think the takeaway is that they're a powerful tool, but not a magic bullet. As investors, we should always be asking why a company is buying back stock and whether it's the best use of capital. In a bull market that's running on momentum, it's easy to get complacent. Luna: And with the S&P 500 still hovering near seven thousand six hundred, there's no shortage of optimism. But as we've seen, that optimism can shift quickly. Lucas: Right. So keep an eye on those buyback announcements, but also on the balance sheets. That's where the real story lies. And that's what we'll keep digging into here on Bull Market Conversations.