One of the factors that fueled the stock market rally in recent years has been the high level of company stock buybacks. Over the past several years, many companies have borrowed or used free cash flow to purchase their own stock rather than invest for long-term growth. When a company purchases its own stock, it reduces the supply of shares available to investors. If demand remains stable, the reduced supply may cause share prices to rise. However, this trend has been waning recently as many companies have reported weak sales and earnings growth.
According to MarketWatch, the pace of corporate stock buybacks has declined to a four year low. During the second quarter earnings season, announced stock buybacks were just $1.6 billion, well below the $50 billion average over the past four years.
This could be a sign that firms will no longer be supporting their stock prices by creating demand for their own shares. Or it could be that companies have finally identified attractive investment opportunities that management believes will result in a greater rate of return than buying back stock. Either way, it could be a sign of a paradigm shift in the financial markets.