US Companies' Stock Buybacks at 10-Year Low... Signal of a Bear Market?

Proportion of US Companies Buying Back Shares in Q3
Below 10-Year Average of 26.3%
'Bear Market Signal' Warning
Q3 Earnings Likely to Determine Market Direction

Although the U.S. New York stock market has been rallying since the beginning of the year, the proportion of corporate executives buying back their own shares has recently been the lowest in the past decade. While optimism about a soft landing prevails, concerns about a recession are also rising, and uncertainties such as the November presidential election and fears of escalation in the Middle East are increasing. This has led to analysis that the reluctance of corporate executives to buy back shares could be a warning sign of an upcoming market downturn.

On the 6th (local time), the U.S. economic daily The Wall Street Journal (WSJ) reported, based on an analysis of InsiderSentiment.com data, that the proportion of U.S. companies where executives or directors were net buyers of their own shares was 15.7% as of last July. This is the lowest level in the past 10 years.

The proportion of companies with executives net buying their own shares was 25.7% in August and 21.9% in September, but both figures still fell short of the 10-year average of 26.3%.

The scale of share buybacks by U.S. corporate executives has also significantly decreased this year. According to Washington Service, from January to September this year, the amount spent by U.S. executives and directors on buying back their own shares was $2.32 billion, the lowest level in 10 years since 2014 ($1.98 billion). In 2023, the buyback amount for the same period was $3.04 billion, and in 2022 it was $4.44 billion.

As executives, who are well-versed in internal company affairs and sensitive to business outlooks and economic forecasts, avoid buying back shares, some on Wall Street are raising concerns that this may be a signal indicating a shaky U.S. economic outlook. Nejat Seyhun, a professor at the Ross School of Business at the University of Michigan, said, "Insider trading is a very strong predictor of total future stock returns," adding, "The recent low proportion of net insider share buybacks compared to historical averages suggests that future stock returns will also be below average."

In fact, many business leaders have sold investment stocks or disposed of their own shares this year. Warren Buffett, chairman of Berkshire Hathaway and known as the "Oracle of Omaha," sold a large amount of Apple shares and steadily increased cash holdings to $276.94 billion as of the end of June. Jeff Bezos, founder of Amazon, and Mark Zuckerberg, CEO of Meta, sold $10.3 billion and $2.1 billion worth of their own shares respectively this year.

The disposal of shares by major players contrasts with the recent rally in the U.S. stock market. The S&P 500 index, which is centered on large-cap stocks, surged 21% this year and hit new highs 43 times. The rally in technology stocks driven by the artificial intelligence (AI) boom pushed the index upward. The Federal Reserve's success in lowering inflation without causing a recession also stimulated investor sentiment.

David Harden, CEO of Summit Global Investments, commented, "This is a time when investors need to be cautious," adding, "I don't think Buffett is timing the market for a downturn, but he is indicating that stock prices are overvalued and that he values cash over investments."

Earnings expectations are also being lowered. According to Bloomberg Intelligence (BI), earnings for S&P 500 companies in the third quarter of this year are expected to increase by 4.7% compared to the same period last year. This is significantly lower than the 7.9% growth forecast made by BI in July and represents the lowest growth rate in four quarters. Investors are expected to gauge the economic outlook through upcoming earnings reports from banks such as JPMorgan and Wells Fargo later this week.

Some analysts believe that although volatility may increase for the remainder of the year due to the possibility of a U.S. recession, uncertainties surrounding the November presidential election, and fears of escalation in the Middle East, the stock market rally could continue if third-quarter corporate earnings hold up.

Adam Parker, founder of Trivariat Research, said, "Investors want to see solid earnings from companies," adding, "With many events such as geopolitical risks and macroeconomic uncertainties unfolding, corporate earnings and outlooks are especially important this time."