Stock buybacks just hit an all time record (Here’s what happened last time)

The first came in the late 1990s during a period of widespread optimism and tech hype on Wall Street. This was followed almost immediately by the dot-com bust, wiping out trillions in market value.

Buybacks surged again in the mid-2000s, reaching $170 billion per quarter by the end of 2007. That peak came just before the Great Financial Crisis. And today, it's happening again.

American companies are buying more of their own shares than ever before

In July, US firms announced a staggering $166 billion in stock buybacks. That’s the most for any July on record, shattering the previous peak of $88 billion set back in 2006.

This flood of corporate cash has provided constant buying pressure for the stock market, acting as a catalyst for this bull run by absorbing selling pressure and pushing prices higher. But what if this massive surge in buybacks is actually a red flag, possibly signaling a peak before a major market top?

What is a stock buyback?

It’s exactly what it sounds like — a company repurchasing its own shares from the open market. Fewer outstanding shares mean higher earnings per share, and that often leads to a higher stock price. But it's also a vote of confidence. Companies tend to buy back shares when they’re flush with cash.

Companies have been hoarding growing amounts of cash over the past 25 years or so, and those cash holdings surged after the pandemic. So buybacks are often seen as a sign that a company is prospering and signals optimism about future growth. Otherwise, they’d likely squirrel that money away for a rainy day.

But the big question today is — does this latest buyback surge signal genuine corporate confidence and future growth? Or is it a short-term tactic to prop up stock prices while revenues stagnate?

To answer that, we need to look at past buyback surges. First, the dot-com bubble. We all know the story. Tech hype inflated internet stock prices, and Wall Street was taken in by it. As stock prices and profits soared, so did buybacks. This frenzy saw buybacks soar from under $10 billion in Q1 1994 to a peak more than four times higher in 2000.

Of course, what happened next was a major market top. It turns out much of the optimism fueling these inflated valuations was misplaced. When the bubble burst, those buybacks declined fast as the market corrected.

S&P 500 buybacks rocketed to a quarterly record $170 billion in Q3 2007. That’s another four-times increase over the previous quarterly peak before the dot-com bust. Then came the Great Financial Crisis — one of the biggest stock market crashes in living memory. And as the stock market plummeted, so did buybacks, which fell to a low of just $25 billion in Q2 2009 as companies scrambled to preserve cash.

So, is today’s situation just like 2000 or 2007? There are a few key differences. First, corporate America is sitting on an unprecedented pile of cash. The total cash and short-term investments held by S&P 500 companies is estimated to be over $4 trillion. This provides an enormous war chest for buybacks, potentially allowing companies to continue repurchasing shares even if the market gets volatile — something they couldn’t do in 2008 or 2020.

But here’s where the story gets more nuanced. While the dollar amount of buybacks is at a record high, the rate of growth tells a different story. If we look at the year-over-year change in buybacks, we see a massive spike before the dot-com crash and another huge surge before the 2008 crisis. The optimism was off the charts.

Today, the growth is strong, but it’s not the explosive, exponential surge we saw before past market tops. In fact, the rate of change is well within the range we’ve seen over the past decade. This suggests that while companies are confident and buybacks are at all-time highs, we are not at peak irrational exuberance.

So, where do we go from here?

First, the bullish case. In this scenario, the massive cash pile and strong balance sheets could be genuine signs of strength. It shows that companies believe their earnings will remain solid, supported by trends like AI, and see their own stock as the best investment. These buybacks could act as a powerful tailwind for the market, creating a price floor that supports a potential sustained rally.

But the bearish case is that the current surge of buybacks and optimism is a sugar high. The buybacks could be masking weak fundamentals like flat revenue growth and diverting money that should be going into long-term investments like R&D or expansion. There’s also growing regulatory pressure.

The SEC has new rules requiring more transparency, and the 1% excise tax on buybacks could be raised to as high as 4% in the future, making them less attractive. And here’s the real risk: If a recession does hit and earnings deteriorate, buybacks have a history of vanishing overnight. That floor of support would disappear, leaving stocks vulnerable to a sharp decline.

So, are today’s record buybacks a bullish signal or just smoke and mirrors? The truth is, they’re a bit of both. Like the surges before the dot-com and 2008 crashes, today’s buybacks are providing powerful but potentially temporary price support.

They’re an excellent sentiment indicator. They tell you management is confident, but they’re not a guarantee of future business performance. History shows that this support can and does vanish when fundamentals weaken.

For now, the buyback boom is a tailwind for the market. But it’s crucial to remember that while buybacks can boost a stock today, only real innovation and earnings growth can sustain it tomorrow.

At Capital.com, we’ll keep you updated on what happens with corporate buybacks and the latest market trends.

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