Ask any financial expert to provide a basic explanation of how the U.S. stock market operates, and you can bet they’ll mention corporate earnings. When the economy does well and companies improve their earnings, the stock market makes gains. In other words, the stock market and the economy maintain a linear relationship. However, the U.S. stock market at present reflects no such relationship, even though it may appear otherwise.
While the stock market has made impressive gains, even reaching historic highs, the U.S. economy itself hasn’t performed nearly as well, nor have individual companies and major players on the stock market.
Rather than share prices that are bolstered by corporate earnings, today’s stock market share prices are the result of companies engaging in more buybacks. By buying back their own shares of stocks, these companies are distorting the image of their company’s success and driving up prices, and often borrowing funds to do so. Tangible earnings are no longer the primary determinant for today’s stock market gains.
Companies that continue to participate in heavy share buybacks even include major players like Apple, which has promised it will increase its return to shareholders by approximately 70 billion dollars by the close of 2017; how will it provide those returns? You guessed it: buybacks. But it’s not just Apple; the majority of companies in the S&P and Dow are increasing their buyback efforts this year; in fact, buybacks have more than doubled year-to-date since last year. Studies estimate that in total, companies on the stock market will spend $1 trillion in buybacks and dividends in 2015; this is an estimated 13.1% increase as compared to 2014.
What’s even more troubling about the increase in corporate stock buybacks is that fact that it’s creating a growing disparity in corporate fund allocation. Companies are now spending 50% more on buybacks than total capital expenditures, and are spending 4 times more than research and development. Buyback expenditure is also 5 times more than money spent for merging and acquisitions.
As financial experts like Dawn J Bennett, host of the “Financial Myth Busting with Dawn Bennett” radio show, point out, this type of spending doesn’t position companies well. Rather than investing in pursuits that will increase their earnings and provide long-term stability, companies are only focused on driving the stock market higher here and now. Unfortunately, propping up the stock market with anything but real earnings is bad news for all.
Bennett Group Financial Services LLC, based in Washington, D.C., is a comprehensive financial services firm committed to providing opportunities to clients’ as they seek long-term financial success. Its customized programs are designed with the potential to help grow, lower overall risk and conserve client assets by delivering a high level of personalized service and skill.
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett firstname.lastname@example.org