- Goldman Sachs expects $720 billion of stock buybacks to boost the S&P 500 in the coming months.
- The bank said the benchmark index should rise around 5% to 4,700 by the end of the year.
- Companies have started buying back their own shares at a rapid rate, after a slowdown in 2020.
- Sign up here for our daily newsletter, 10 Things Before the Opening Bell.
Goldman analysts, led by David Kostin, think S&P 500 companies will buy back $726 billion of their own stock this year, they said in a note on Friday. That would be up sharply from 2020's figure, when the pandemic limited the practice.
"Strong corporate equity demand is one reason we forecast a 5% return to our S&P 500 year-end target of 4,700," Kostin and his team wrote. "From a flows perspective, the sharp rebound in buybacks supports our view that corporates will rank among the largest buyers of US equities this year."
Kostin added that the strength of buybacks supports current stock valuations, despite the fact that prices have reached their highest levels relative to company earnings in 40-odd years.
The S&P 500 closed at a record high of 4,468 on Friday. US stocks have bounced back remarkably strongly from last year's pandemic-induced crash, with the S&P rising more than 90% from lows seen in March 2020.
In recent years, US companies have increasingly bought their own stock as a way to reward shareholders. Critics say the practice is short-sighted and overly benefits executives, but others argue it is a good use of excess cash.
Buybacks slowed sharply in 2020 as companies preserved capital due to the pandemic. S&P 500 share repurchases fell 29% year-on-year to $520 billion, according to S&P Dow Jones Indices.
But a rapid economic rebound, huge amounts of government stimulus, and a removal of repurchase restrictions have seen companies announce buybacks at a rapid rate in 2021. The information technology, financials, and communication services sectors have been the biggest buyers so far.
Goldman's analysts said clients were concerned that high levels of stock issuance could weigh on prices if not met by adequate demand. A particular worry is the end of IPO lock-ups, typically a 180-day period where insiders aren't allowed to sell stock.
Yet Goldman said: "Despite elevated equity issuance, corporates were net buyers of stocks in [the first half] and should remain so in the rest of 2021, particularly after accounting for [mergers and acquisitions]."