We can point to the massive amounts of leverage in the form of margin behind the China stock rally. In the US, it’s corporate buybacks and cheap financing that has levered our rally.
US corporations have essentially been issuing record levels of debt and using a significant chunk of their earnings and cash reserves to buy back record levels of common stock.
Gross leverage for the median US Investment Grade (IG) corporation at 2.2x is higher than it was in the 2006-2008 period and is now approaching the highs seen in 2001.
Since 2012, more than 50% of EPS growth in the S&P 500 has been driven by buybacks and growth ex-buybacks has been a mere 3.3% annualized.
Why Are Companies Buying Back Shares? Lack of confidence in organic growth alternatives, very low cost of debt relative to equity and a struggle to improve ROE.
The fact is that in the current cycle, investment (CAPEX) growth has been low and with the exception of 2011, has struggled to match the last 2 cycles. Companies would simply rather use buybacks instead of making investments in their own growth to boost share prices.
Meanwhile, US margin debt hit $476 billion in March, the highest in 50 years.
