Bank of America equity strategists anticipate that corporate stock buybacks will be restrained in the foreseeable future due to tighter financial conditions and increased capital costs.
According to a note to clients by the BofA strategists, the fact that debt issuance remains subdued suggests that buybacks may continue to be tepid, which could negatively impact growth stocks.
This slowdown is expected to be most pronounced in the technology and health-care sectors, where debt-financed buybacks had a more detrimental effect.
The phenomenon of companies buying back their own stock gained prominence after the global financial crisis, as companies took advantage of low financing costs. Prior to the financial crisis, buybacks did not have a net benefit on earnings, according to BofA.
The spread between earnings yields and corporate bond yields has proven to be a strong leading indicator of buyback activity, and it currently points to subdued buybacks in the future.
In the face of tighter credit conditions and higher capital costs, buybacks are at greater risk compared to capital expenditure.
Recent data indicates that buybacks have notably slowed, with a 26% year-over-year decline in the second quarter. However, they performed better in the third quarter, down just 3% year-over-year from 47 companies, according to BofA's data.