Companies in the S&P 500 will likely authorize a record $1 trillion in stock buybacks in 2018, according to an estimate released by Goldman Sachs Friday. Buyback announcements have surged to $754 billion so far this year, and the bank said that the corporate tax cuts and strong cash flow have played a major role in the increase. If the current trend holds, authorized buybacks will rise 46 percent this year compared to 2017.
Analysts at the bank expect the share repurchases to have a significant positive effect on stock prices. “Corporate repurchases remain the largest source of demand for shares,” Goldman’s David Kostin said in a note to clients. “Buybacks represent the critical source of demand for shares given most other ownership categories are net sellers of stocks (households, mutual funds, pension funds).”
There’s another trillion-dollar figure on the horizon, however, that threatens to take some of the wind out of the market’s sails: the federal government’s annual deficit, which is expected to hit $1 trillion by 2020. “Another strategically important but more bearish $1 trillion question relates to the U.S. government’s fiscal balance,” Kostin wrote. “This could indicate a number of risks for investors, including the possibility that interest rates rise more rapidly than expected and weigh on equity valuations.”