Watch for robust earnings growth at big techs such as Meta Platforms Inc. (NASDAQ: META), Nvidia Corp. (NASDAQ: NVDA), Microsoft Corp. (NASDAQ: MSFT) and Apple Inc. (NASDAQ: AAPL) to increase the rate of share buybacks this year, says a recent report from Goldman Sachs. 

Goldman Sachs is forecasting that S&P 500 companies will increase share repurchases by 13% year-over-year, to $925 billion. The investment bank’s analysts previously anticipated a 4% increase in share buybacks, after a 14% decrease in 2023. 

Analysts added that they expect buybacks to surpass $1 trillion by 2025.

Why is this important for investors?

Share Buybacks Boost Stock Value

Price appreciation and dividends get the lion’s share of attention from investors, but share repurchases increase stock value by signaling confidence in the company's future. They reduce the supply of outstanding shares, which can boost earnings per share. 

Buybacks can potentially drive up stock prices due to improved fundamentals and increased demand for shares while supply has been reduced. 

In addition, buying back shares is a tax-efficient way to return capital to shareholders without committing to regular dividend payments. 

Goldman Sachs’ buyback forecast was also a nod to continued earnings growth at mega-cap technology stocks and communications services stocks. Analysts expect these stocks to account for a “substantial” percentage of the growth in S&P 500 buyback this year.

Goldman Sachs: Macro Improvements Driving Forecast

While Tesla Inc. (NASDAQ: TSLA) earnings are declining and the stock is in a slump, artificial intelligence stocks like Advanced Micro Devices (NASDAQ: AMD) and Applied Materials Inc. (NASDAQ: AMAT) have rotated into leadership. 

In their report, Goldman Sachs analysts wrote, "Improvements in the broader macro environment since the fall, like the decline in Treasury yields, also help to inform our forecast upgrade."

Goldman had previously increased its 2024 S&P 500 earnings estimate by 8% to $241 a share. It expects a further increase of 6% next year, to $256, per share.

Headwinds for Increased Buybacks

However, frothy valuations and uncertainty about the upcoming U.S. presidential election could put a damper on buybacks, according to Goldman Sachs analyst Cormac Conners. 

He added that current regulatory filings show the so-called Magnificent Seven stocks have authorized a total of $215 billion in share repurchases for this year, up 30% from a year ago. 

Dividends or Buybacks?

If more big techs and communications services companies begin paying dividends, that could diminish repurchase plans. For example, a recently announced Meta Platforms dividend of 50 cents per share indicates management’s confidence in the company’s future earnings.

If more high-growth companies opt to pay dividends, that could reduce their enthusiasm about buybacks. 

Apple and Microsoft pay dividends, but Nvidia, Amazon.com Inc. (NASDAQ: AMZN), Tesla and Alphabet Inc. (NASDAQ: GOOGL) do not. Analysts say Alphabet and Amazon are among stocks likely to initiate a dividend. 

Fast-growing tech companies often prioritize reinvesting profits into research, development and expansion rather than paying dividends. Taking Nvidia as an example, it makes sense that the company would want to ramp up its AI chipmaking capabilities right now, opting to return capital to shareholders in the form of price appreciation.

Techs Often Retain Earnings 

This focus on growth and new opportunities helps fast-moving companies like Nvidia maintain a competitive edge. 

Additionally, tech companies may prefer retaining earnings for flexibility, such as funding acquisitions or investing in innovation. Techs such as Alphabet, Apple and Microsoft are known as cash hoarders. 

In addition to providing options, the cash also provides a cushion due to market and economic uncertainties. 

It’s not just techs that have been announcing stock buybacks recently; data compiled by MarketBeat shows companies from a range of industries saying they would repurchase shares, signaling confidence in these companies’ earnings strength.

In the past month, companies including Ulta Beauty Inc. (NASDAQ: ULTA), Archer-Daniels-Midland Co. (NYSE: ADM), Ross Stores Inc. (NASDAQ: ROST), Tidewater Inc. (NYSE: TDW), TJX Companies Inc. (NYSE: TJX) and eBay Inc. (NASDAQ: EBAY) announced share buyback programs.