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Share buybacks in the U.S. stock market have slowed to their slowest pace since the early days of the Covid-19 pandemic as rising interest rates reduce incentives for companies to buy their own shares.

Companies in Wall Street’s benchmark S&P 500 spent $175 billion buying back shares in the three months to June, preliminary S&P data showed. This is down 20% from the same period last year and 19% from the first three months of 2023.

Analysts say the slowdown could mark the start of a longer-term trend that could put downward pressure on stocks.

“Structural reasons and the interest rate environment are both contributing factors,” said Jill Carey Hall, equity and quantitative strategist at Bank of America. “We don’t expect buybacks to be that large for the foreseeable future.”

S&P 500 Quarterly Stock Repurchases Bar Chart ($Billions) Shows Rising Interest Rates and Banking Concerns Impacted Buybacks

In recent years, corporate buybacks have become an increasingly important but controversial part of the stock market. They can directly support stock prices by increasing demand, and they can also help increase earnings per share profitability by reducing the number of shares outstanding.

Critics of stock buybacks, however, accuse corporate boards of using stock buybacks to artificially inflate stock prices and reward senior executives rather than investing in the long term or raising wages for low-wage employees.

Companies now face new investment needs and higher borrowing costs, making buybacks less of a priority.

“When interest rates were at zero, it made sense for companies to issue long-term, low-interest-rate debt and use it to buy back stock. Not so much now,” Carey Hall said. At the same time, businesses are under increasing pressure to invest in areas such as supply chain reshoring, automation and artificial intelligence, and achieving net zero targets, she added.

The second-quarter decline was exacerbated by the banking crisis in March. After a cautious 2022, many banks stepped up buybacks in the first quarter, with financial groups surpassing technology stocks as the largest sector for buybacks for the first time in six years.

However, bank buybacks slowed and regulators announced tougher capital requirements after the collapse of several smaller banks raised concerns about the health of the industry.

“Looking forward, the concern is not more bank failures but new regulations,” said Howard Silverblatt, senior index analyst at Standard & Poor’s. “They need to protect their dividends again. .Between maintaining the dividend and buying back, the dividend wins every time.”

Since the beginning of the year, U.S. stock buybacks have also been subject to a new 1% tax. Silverblatt said at current levels, the tax doesn’t have much of an impact. However, the tax, a rare move with bipartisan support, is expected to increase in coming years, which could put further pressure on spending.

“Some companies may be affected sooner, but I think a 2.5% tax would have a significant impact . . . (and) a shift in spending from partial buybacks to dividends,” Silverblatt said.

Some investors, particularly in Europe, also believe companies should return capital through dividends rather than buybacks. Companies counter that buybacks are more flexible and can be easily increased or reduced when conditions change, while dividend cuts typically result in sharp declines in share prices.

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