One of the biggest forces powering the stock market is stalling

source
Arnd Wiegmann/Reuters

Companies have finally hit the limit for buying up their own stock according to Deutsche Bank.

Buybacks have been the dominant driver of demand for stocks since 2009, according to HSBC research. And total activity in 2016 is set to total $450 billion, according to David Bianco, chief equity strategist at DB.

According to a note from Bianco, this is roughly the same level as 2014 and 2015.

Additionally, Bianco estimated that 20% of the S&P 500’s earnings per share will come from buybacks. By shrinking the amount of stock outstanding, earnings are boosted on a per share basis.

According to Bianco, certain industries will see a more significant slowdown in buyback activity than others.

“Strains on maintaining buybacks (even dividends) will be at Energy, Industrials, and Materials,” said Bianco. “But Healthcare and most of big cap Tech should be in a very good position to maintain buybacks or even boost them a bit as [free cash flow] at these sectors is healthy and these companies still very much have access to bank lines of credit and debt capital markets and low interest rates.”

source
Deutsche Bank

The buyback boom may be in danger for a variety of reasons. Bank lending standards are getting tougher, the market believes interest rates are going to head higher, and the debt market may not be as benign as it has been.

On the other hand, while a variety of factors point to buybacks slowing, the absolute level of conditions is still accommodative. For instance, tightening from 0% interest rates to 1% interest isn’t as big a deal as going from 5% to 6%, so the decline in buybacks may be limited.