Nvidia, the prominent chip maker, made waves by announcing its intention to repurchase $25 billion worth of stock following their impressive earnings results. It appears that Nvidia’s goal is well within reach. In the last quarter alone, the company repurchased roughly $3.3 billion, which accounted for over half of its free cash flow. Analysts are now projecting a substantial cash flow of $34.4 billion for next year. Considering their track record, if Nvidia plans to return more than half of this amount through buybacks, the total repurchase could reach an impressive $20 billion.
Buybacks have proven to be a crucial element in driving stock market returns for investors. Some shareholders benefit by receiving cash in exchange for selling their shares back to the company. Meanwhile, other shareholders experience a boost in earnings per share due to the reduction in outstanding shares.
Nvidia’s ability to generate significant profits gives them the ability to distribute substantial returns to their stockholders. While it is true that most companies will not achieve the same level of success as Nvidia, it is likely that buybacks will increase across the board if they can demonstrate earnings growth, especially after the tumultuous year that was 2023.
According to Citi, companies listed on the S&P 500 repurchased more than $400 billion worth of stock in the first half of this year. If this pace continues, they are set to return over $800 billion by the end of 2023, marking a decrease of approximately 11% compared to the previous year.
S&P 500 Companies Brace for Impact as Revenues Remain Stagnant
Introduction
According to Credit Suisse, the S&P 500 aggregate net income experienced a decline of approximately 5% in the first two quarters of this year. This comes as no surprise given the impact of higher interest rates on companies’ sales. Despite efforts to generate revenue, the index saw almost no growth in the first half of the year, while companies struggled with increased costs such as rising wages and salaries. As a result, profit margins have suffered and bottom lines have been hit.
Slowdown in Demand Expected to Ease
Fortunately, economists predict that the Federal Reserve’s efforts to raise interest rates and dampen demand are nearing an end. This expectation is supported by the decline in the rate of inflation. Analysts anticipate a significant boost in aggregate free cash flow per share for the S&P 500, estimating a growth of about 12% by 2024. This positive outlook is driven by projected sales and profit growth, as well as the implementation of stock buybacks.
Optimism Surrounds Buybacks
While there may be concerns regarding this year’s pullback in buybacks, Citi strategist Scott Chronert suggests that it should not cause alarm. Chronert anticipates a shift towards positive inflection in free cash flow growth for the S&P 500 heading into 2024—an encouraging sign for investors and companies alike.
Future Outlook
In light of these developments, it is expected that profits and buybacks will soon rebound, providing a much-needed boost to the stock market.
