Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / Why Market Leaders Are Buying Their Own Stock
Transcript
- Lucas: Look at the S&P 500 right now. It is sitting at seven thousand seven hundred twenty-four points, and if you strip away the noise of the last few days, what you see is a market that is being held up by its own constituents. We are seeing record levels of corporate share repurchases happening in real time. Luna: But aren't those buybacks usually seen as a sign that companies have run out of ideas for organic growth? Lucas: That used to be the headline version of the story. But when you look at the balance sheets of the mega-cap tech stocks, it is less about running out of ideas and more about capital efficiency. Companies like Microsoft and Alphabet are generating so much free cash flow that paying a dividend feels like leaving money on the table. They are buying back their own equity because they believe it is the highest-returning asset on their books. Luna: So it is really a valuation play? If the stock is cheap relative to earnings, they just keep buying until it isn't? Lucas: Exactly. And here is the concrete thing you can take away today: roughly two percent of the total float of the S&P 500 gets retired every single year through these buybacks. That is not a rounding error. That is a structural tailwind. When you combine that with the current nominal GDP growth of two point two percent, you have a scenario where the supply of shares is shrinking faster than the economy is growing. Luna: That implies that even if earnings stay flat, EPS should still go up simply because there are fewer shares left to divide the profit among. Lucas: Right. Earnings per share is an accounting metric, and it is directly manipulated by treasury decisions. So when we talk about bull markets ignoring weak growth, like we did in episode two thirteen, part of that illusion is created by the denominator effect. The numerator might be stagnant, but the denominator is getting smaller. Luna: It sounds like a self-fulfilling prophecy then. The act of buying drives the price up, which makes the company look healthier, which allows them to borrow more to buy even more. Lucas: That is the cycle, yes. And it is being fueled by debt markets that are surprisingly resilient. Even though the Federal Reserve funds rate is hovering around three point eight eight percent, investment-grade companies can still issue bonds at attractive spreads. They are locking in fixed-rate debt to buy back variable-risk equity. It is a classic arbitrage trade. Luna: But doesn't that leave them vulnerable if rates stay higher for longer? You mentioned earlier that the interest on reserve balances is at three point nine zero percent. Lucas: It does create a ceiling. If borrowing costs exceed the return on equity, the math breaks. But right now, for companies with strong credit ratings, the cost of debt is still lower than their internal rate of return. We are seeing this clearly in the cloud infrastructure sector, where companies like Cisco and Oracle are using their massive cash piles to defend their margins while competitors burn cash on AI infrastructure. Luna: I find it interesting that Palantir is still defying the market momentum in a different way. They are growing revenue aggressively, whereas these legacy giants are just managing their capital structure. Lucas: Palantir is a different beast entirely. They are trading at one hundred ninety-nine dollars and showing genuine top-line expansion. The buyback story is mostly about maturity. These are companies that have already won the war; now they are just cleaning up the battlefield and rewarding shareholders. It is a defensive form of aggression. Luna: So for the average investor, does this mean we should just hold onto these stocks because the companies are essentially acting as our own hedge fund? Lucas: Not necessarily. Because when everyone knows the playbook, the premium compresses. If the market anticipates a buyback, the stock price often runs ahead of it. What we are seeing in October is a bit of fatigue. The RUT index is up one point three percent over the last five days, suggesting that small caps are trying to catch up to this narrative. Investors are wondering if the big guys have maxed out their capacity to buy. Luna: Is there a risk that if the economy slows down further, these companies will stop buying just to preserve liquidity? Lucas: That is the pivot point. Historically, buybacks accelerate during recessions because cash becomes king. But in this specific environment, with the VIX low and volatility harvesting strategies active, the incentive to maintain the stock price is high. Management compensation is heavily tied to EPS targets. Stopping buybacks would break those contracts. Luna: It’s almost like the financial engineering has become the product itself. The software or the service is secondary to the capital return strategy. Lucas: For some of them, absolutely. Look at the broader tape. The NYA is only down two tenths of a percent, meaning the heavyweights are absorbing all the selling pressure. When you have that much structural demand coming from inside the index, it creates a very sticky floor for valuations. Luna: This brings me to the donation segment. If our conversations about capital allocation and market mechanics have helped you understand where your own money is working hardest, consider supporting the show. It keeps us independent and ad-free. You can support us at buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. Lucas: We appreciate it. Every contribution helps us dig deeper into these numbers instead of chasing headlines. Now, let’s get back to the debt side of this equation. Luna: Right, because if rates jump, that entire buyback engine stalls. How exposed are these companies actually? Lucas: Most of the major tech firms have long-dated debt maturing well into the thirties. They locked in rates years ago. So even if the Fed Funds rate stays at three point eight eight percent, their actual interest expense on new borrowings hasn't moved much. It is a buffer against shock. Luna: So the market isn't pricing in a sudden crash of buybacks because the debt is old and cheap? Lucas: Precisely. They are floating on a sea of low-cost capital. But there is a subtle shift happening. We are seeing more companies move from discretionary buybacks to committed programs. This signals confidence. It tells the market, 'We are not waiting for a dip; we are removing shares systematically.' Luna: That reduces uncertainty. Investors hate guessing games. A committed program is a promise of future demand. Lucas: And that promise is what keeps the momentum alive. Even when headlines about SpaceX or Netflix cause daily volatility, the underlying flow of capital remains steady. The S&P futures might dip, but the institutional money is watching the treasury departments, not the press releases. Luna: It seems like the smart money is betting on efficiency over expansion. Growth is expensive right now, so they are just making what they have better. Lucas: Efficiency is the new growth. Margins are expanding because they are shedding share count and focusing on high-return projects. It is a quieter kind of power. Less flashy than launching a new AI agent, but far more durable. Luna: Do you think this trend will reverse once the next recession hits, or has it become permanent? Lucas: I think it has become permanent for the top tier. The culture of shareholder return is baked into the DNA of these corporations. They might slow down, but they won't stop. It is a fundamental change in how American capitalism operates. Luna: One final thought: if you are holding these stocks, you are essentially being paid to wait. The company is doing the work of compounding for you. Lucas: Exactly. You don't have to trade the volatility. You just have to sit there while the denominator shrinks. It is the most boring, profitable strategy in finance right now. Luna: Boring is good. Especially when the charts are pointing up. Lucas: Let’s see if the RUT can keep that one-point-three-percent lead going into next week, or if the big caps will pull the index back up again.