Buybacks Are Back and So Is the Rally

Buybacks Are Back and So Is the Rally

• S&P 500 Index members bought back $549 billion worth of shares in 1H.

• Goldman Sachs estimates they’ll repurchase $1.1 trillion this year.

• That should drive down the earnings multiple, making stocks cheap.

Just when investors thought the rally was running out of steam, a fresh tailwind is about to kick in…

Since the closing low in early April, the S&P 500 Index has been on what feels like a nonstop tear higher. With expectations for a worst-case tariff scenario, momentum investors were poorly positioned for a rally. That forced them to cover shorts and increase long exposure.

The shift helped drive the S&P 500 up 33.6% from the lows, and 13.4% so far this year…

Yet even with the rally, those same momentum funds still haven’t fully bought back in. According to brokerage firm UBS, gross leverage to the market remains near the lowest levels we’ve seen on both a one- and five-year basis. That means they could increase leverage by another 20% before hitting the recent peak. Algorithmically driven Commodity Trading Advisors (CTAs) have another 33% upside before reaching their own ceiling.

Now, a fresh catalyst is lining up…

Today marks the formal start of third-quarter corporate earnings. Once companies report, they can resume buying back their own shares. That boosts earnings power while lowering the fair value price-to-earnings (“P/E”) multiple on the S&P 500. Together, these forces would support a long-term, steady rally.

But don’t take my word for it, let’s look at what the data’s telling us...

Typically, quarterly earnings kick off when financial giants like JPMorgan Chase (JPM), BlackRock (BLK), Citigroup (C), and Wells Fargo (WFC) release results. Then, typically two weeks later, large-cap tech names like Alphabet (GOOGL), Apple (AAPL), Amazon (AMZN), Meta (META), and Microsoft (MSFT) follow suit.

Ahead of those reports, most companies pause buybacks for about two weeks. But a day or two after earnings drop, they’re free to resume repurchase plans. And here’s the twist: tech and financial firms tend to be the most aggressive buyers of their own stock.

During the first half of this year, S&P 500 companies bought back roughly $549 billion worth of shares. According to Goldman Sachs, those numbers are expected to swell…

The chart above shows annual stock buyback totals. Solid bars reflect confirmed amounts, while shaded bars represent estimates for 2025 and 2026. As you can see, the trajectory has been steadily higher—with a record $982 billion in shares repurchased in 2024. That amount is projected to be surpassed in 2025 and 2026. Goldman expects companies to allocate approximately $1.1 trillion and $1.2 trillion, respectively, to share buybacks over the next two years.

That matters for earnings. If the number of outstanding shares shrinks while business holds steady, earnings per share (EPS) naturally improve—because the math changes with fewer shares. If business improves, earnings power compounds even faster.

For example, say a growth-oriented tech stock has a fair value P/E multiple of 32x. With 100 million shares and $1 billion in forecast earnings, EPS would be $10, implying a fair value of $320. But if the company retires 10% of its shares—leaving 90 million—and earnings stay flat, EPS rises to $11.11. At the same multiple, fair value jumps to $355.52. The buyback lowers the effective multiple and creates more room for price upside.

Now apply that logic to an index…

S&P 500 earnings power resembles that of a single company—an aggregate of its constituents. Over the next 12 months, those members are expected to earn $294.29, according to FactSet.

At a forward 12-month P/E of 22.8x, that implies a fair value near 6,710. But with tech companies making up 35% of the index, a 23x multiple may be more appropriate, pushing fair value closer to 6,745, or 1.4% above current levels. Calendar year 2026 estimates of $303.96 suggest a fair value of 7,000 by year-end.

Now layer in expected buybacks. Wall Street anticipates a 3% reduction in outstanding shares by year-end. That boosts earnings power through share compression, lowers the effective multiple, and opens the door for investors to push the index even higher.

Look, it’s just the start of earnings season, but the signals are clear. Companies are increasingly using AI to power better-than-expected profits. If tech confirms the trend, earnings estimates may already be too low. That would cause the current P/E multiple to drop, making stocks look cheaper. And with expanded earnings potential from buybacks layered on top, the S&P 500 may have even more upside ahead than investors realize.

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