MW There's a Fed put and a Trump put - but don't forget the C-suite put as well

By Jamie Chisholm

Buybacks may hit $1 trillion this year as companies switch from capex

Stock market optimists often proclaim that equities are protected by various puts. In option parlance, buying a put protects you from a fall in an asset price.

The "Fed put" means that if a diving market threatens to damage the economy via the wealth effect then the U.S. central bank will cut borrowing costs. The "Trump put" hoped that the new administration would dial back its destabilizing policies if the market feared a sharp economic downturn.

Can we now add the "C-suite put?" That's when economic uncertainty discourages corporate capital expenditure and as equities fall encourages instead more share buybacks.

That's what analysts at Citi led by Scott Chronert think may happen.

In a note published Monday, the Citi team said: "[A]n analysis of S&P 500 capex and buyback trends supports our ongoing constructive structural view on the index. Cash flow deployment could incrementally shift from capex to buybacks should further equity price weakness unfold."

At the moment strategists are positive on corporate investment. S&P 500 SPX capex is forecast to increase by 7% this year, having jumped 13% in 2024, said Citi. Much of the spending is led by big tech, with the Magnificent 7 stocks expected to contribute nearly 32% of projected 2025 capex.

Corporate optimism saw executives reallocate some cash flow use from buybacks to capex in 2024, according to Citi. This can be seen in the table below, for example, where growth companies trimmed buybacks by 3.6% and increased capex by 3.5%.

The Citi team say Trump administration policy risks, particularly related to tariffs, are not properly reflected in 2025 consensus company earnings expectations.

"Simply, ongoing uncertainty as to magnitude and duration of tariffs makes it difficult for analysts to project impacts with much precision for single stocks let alone at the index level," said Citi.

"Ultimately, the Trump policy path toward reshoring and related infrastructure...should, in theory, lead to higher capex spend. But, at current, it is hard to see that forest through the trees," they add.

This mean that there is a risk capex, in the short to medium-term, will be less than forecasts. And if that happens, managers will be reluctant to invest for growth and may instead look to take advantage of falling share prices.

Aggregate buybacks for the S&P 500 were nearly $900 billion in 2024. Citi think that level is achievable this year, and it could rise to $1 trillion if equity markets continue to be under pressure.

"Essentially, lower stock prices should, at the company specific level, cause C-suites to reconsider cash deployment. This is predicated, intuitively, on lower stock prices reflecting, at least to some degree, economic/macro uncertainty," said Citi.

This would help stock markets find a floor, Citi said. "A -10% retrenchment from the February 19 highs would take the S&P 500 toward the 5500 level. Based on our current fundamental expectations this would provide an attractive risk/reward setup relative to our current 6500 base case," the bank said.

Related: Here's the level that could be an attractive entry point for stocks, says Morgan Stanley's Mike Wilson

-Jamie Chisholm

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March 10, 2025 08:19 ET (12:19 GMT)

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