One of the biggest forces powering the stock market is stalling

Corporate buying of their own stock may have finally hit a limit according to Deutsche Bank.

Buybacks, which HSBC showed was the largest driver of demand for stocks since 2009, will total around $450 billion according to David Bianco, chief equity strategist at DB. According to a note from Bianco, this is roughly the same level as 2014 and 2015.

Additionally, Bianco estimated that 20% of the S&P 500’s earnings per share will come from buybacks. By shrinking the amount of stock outstanding, earnings are boosted on a per share basis.

According to Bianco, certain industries will feel pressure on their cash flows and thus buybacks, while there is room to grow at others.

“Strains on maintaining buybacks (even dividends) will be at Energy, Industrials, and Materials,” said Bianco. “But Healthcare and most of big cap Tech should be in a very good position to maintain buybacks or even boost them a bit as [free cash flow] at these sectors is healthy and these companies still very much have access to bank lines of credit and debt capital markets and low interest rates.”

This may be in danger as bank lending is creeping tighter, the market believes interest rates are going to head higher faster than originally expected, and the debt market may not be as benign as it has been.

On the other hand, while these conditions are moving in the wrong direction to facilitate more buybacks, the absolute level of conditions is still accommodative. For instance, tightening from 0% interest rates to 1% interest isn’t as big a deal as going from 5% to 6%, so the decline in buybacks may be limited.

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