Nvidia plans to buy back billions of shares other companies could join soon.

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Is Nvidia’s stock buyback plan a sign of a major topic that could help drive the stock market?

The chipmaker announced plans to buy back $25 billion in shares on Wednesday when it reported impressive earnings results. The goal also looks achievable: Nvidia (trading symbol: NVDA) in the July quarter bought back nearly $3.3 billion in stock, just over half of its free cash flow. Analysts are now projecting cash flow of $34.4 billion next year, so if the company plans to return more than half of that amount in buybacks, the total buybacks would be close to $20 billion.

Buybacks can often be a major component of stock market returns for investors. Some shareholders receive cash to purchase their sold shares of the company, while others enjoy higher earnings per share because there are fewer shares outstanding.

Nvidia is aggressively increasing its dividend, which enables it to return a lot of money to shareholders. Granted, most companies’ growth won’t be as impressive as Nvidia’s, but if you can see earnings growth after a tough 2023, then buybacks should pick up across the board as well.

In the first half of the year, S&P 500 companies bought back just over $400 billion in stock, according to Citi, so they’re currently on track to return just over $800 billion in 2023. That’s going to be down. by about 11% annually. during the year.

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This is no surprise, though

Standard & Poor’s 500
Total net income in the first two quarters of the year fell by nearly 5%, according to Credit Suisse. Higher interest rates began to affect corporate sales. Index revenues were roughly flat year-on-year during the first half, while companies had to grapple with higher costs, such as higher wages and salaries – leading to lower profit margins and bottom line results.

Investors and corporations alike should prepare for some tailwinds: many economists We think the Fed’s job of raising interest rates and hurting demand is almost done since the rate of inflation fell. Analysts expect total free cash flow per share in the S&P 500 to rise about 12% in 2024, a figure that starts with sales and earnings growth and is helped by share buybacks.

As for buybacks, “the decline this year is not a concern,” wrote Scott Kronert, a strategist at Citi. “We expect a positive turn in free cash flow growth for the S&P 500 through 2024.”

And soon profits and buybacks will come in. This always helps the stock market.

Write to Jacob Sonenshine at [email protected]