American companies are the largest source of demand for American stocks, and sharp tumbles have come when their buying slows.
There are plenty of potential catalysts for the stock market sell-off that has swept through the markets this week. They include rising interest rates, growing tensions with China, expanding federal deficits and increasing regulatory risks for technology companies.
Another element worth considering? The biggest buyers probably aren’t buying.
It may seem counterintuitive, but the largest single source of demand for American stocks is the American companies that issue them. Companies are on track to repurchase more than $770 billion in their own stock this year, according to research from Goldman Sachs. That’s more than twice the size of the next largest source of demand, exchange-traded funds, which last year bought $347 billion in shares.
But those companies are getting ready to report earnings, an event that is preceded by a regular slowdown in buyback activity. Some large market dips in the past year have coincided with these quarterly slowdowns.
Keith Parker, head of United States equity research at UBS Investment Research, said the market has been weaker when buybacks have slowed. “When that dries up or slows significantly, you’re having outsized market effects,” he said.