Amid Interest Rate Cuts... Rising Trend of US Companies' Share Buybacks

Goldman Sachs: "Next Year US Large Corporations' Share Buybacks to Surpass $1 Trillion"

With the U.S. entering a cycle of interest rate cuts, it is forecasted that the scale of share buybacks by large U.S. companies will surpass $1 trillion (approximately 1,300 trillion KRW) next year.

According to major foreign media on the 23rd (local time), Goldman Sachs predicted on the 18th that the Federal Reserve (Fed), the U.S. central bank, would implement a big cut (0.5 percentage point rate cut), and that the share buyback scale of S&P 500 companies, representing the 500 largest U.S. companies, will reach $925 billion this year. This is a 16.35% increase compared to last year ($795 billion), when high interest rates caused a decline in share buybacks by S&P 500 companies.

Goldman Sachs also analyzed that next year, the share buyback scale of S&P 500 companies will exceed $1 trillion. According to S&P Dow Jones, the previous peak period of active share buybacks by S&P 500 companies was in 2022, with a scale of $922 billion.

S&P 500 companies bought back $472 billion worth of shares in the first half of this year alone, amid expectations that the Fed would pivot from tightening to easing. This represents a 21% increase compared to the previous year.

Large companies have accumulated substantial cash ahead of the interest rate cuts. According to Capital Advisors Group, as of last year, the cash holdings of Apple ($166 billion), Microsoft ($100 billion), Alphabet (Google's parent company, $118 billion), Meta Platforms (Facebook's parent company, $58 billion), and Amazon ($55 billion) totaled $497 billion.

Typically, companies tend to buy back shares more aggressively during periods of interest rate cuts, when liquidity is active and borrowing costs decrease. Share buybacks reduce the number of outstanding shares, leading to an increase in earnings per share (EPS), which in turn helps boost stock prices.

Another factor driving share buybacks is the Biden administration's consideration of raising the large corporation stock buyback tax rate from the current 1% to 4%. The large corporation stock buyback tax rate is a tax law first implemented by the U.S. Treasury in April to reduce the tax advantages of share buybacks compared to shareholder dividends. Some big tech companies such as Alphabet and Meta Platforms introduced dividend systems this year, partly influenced by this tax law, but despite this, political circles, mainly Democrats, argue that large corporations pay too little tax and advocate for a significant increase.