Buybacks for companies in the S&P 500 Index turned higher in the third quarter to $175.89 billion after declining from a peak of $222.98 billion in Q4 2018 as represented by the red line in the below chart. With a resumption of higher buybacks, the total of dividend and buybacks increased in Q3 to $299.01 billion versus $284.14 billion in Q2 2019. Quarterly totals for dividend payments consistently maintained growth on a year over year basis, unlike the decline in buybacks.
One might suspect the decline in buybacks might be related to the declining trend in reported earnings. This may be partially true; however, earnings growth is expected to average 10.8% over the two years of 2018 and 2019. Another factor likely contributing to the buyback decline is simply the uncertainty associated with the trade/tariff issues. Additional progress on this front would be welcome news for corporate America and the market. The spike higher in earnings growth in 2018 due to tax cuts made 2019 versus 2018 year over year comparisons difficult. Earnings growth is expected to resume in the first quarter of 2020 with growth of 9.8% for calendar year 2020 versus calendar year 2019.
The resumption of earnings growth that is expected in 2020 is certainly a factor in the positive performance of the stock market this year as stocks tend to trade on expectations. Calendar year 2021 seems like a long way into the future, but bottom up S&P 500 earnings expectations at the moment equal $196.84. This would equate to a 10.5% increase over 2020 expected earnings. This market will not continue to move higher in a straight line; however, all else being equal, company fundamentals are favorable at this point in time.
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