Demand for U.S. shares among companies and individuals is diverging at a rate that may be without precedent, another sign of how crucial buybacks are in propping up the bull market as it enters its eighth year.

Standard & Poor’s 500 Index constituents are poised to repurchase as much as $165 billion of stock this quarter, approaching a record reached in 2007. The buying contrasts with rampant selling by clients of mutual and exchange-traded funds, who after pulling $40 billion since January are on pace for one of the biggest quarterly withdrawals ever.

While past deviations haven’t spelled doom for equities, the impact has rarely been as stark as in the last two months, when American shares lurched to the worst start to a year on record as companies stepped away from the market while reporting earnings. Those results raise another question about the sustainability of repurchases, as profits declined for a third straight quarter, the longest streak in six years.

“Anytime when you’re relying solely on one thing to happen to keep the market going is a dangerous situation,” said Andrew Hopkins, director of equity research at Wilmington Trust Co., which oversees about $70 billion. “Over time, you come to the realization, ‘Look, these companies can’t grow. Borrowing money to buy back stocks is going to come to an end.”’ 

David Fuller's view

A third straight quarter of declining profits is worrying.  It also gives senior management an incentive to increase share buybacks, where possible, particularly following a sharp market decline as we saw during the first six weeks of this year.  After all, their remuneration is earnings-based and earnings per share are calculated on the basis of the share float, which is reduced by share buybacks. 

The corporate buybacks versus investor selling is unnerving, although far less of a concern than global recession and / or higher interest rates from central banks.  However, the global economy remains soft overall and a number of economies are in recession, particularly in the resources sector.  Therefore the risk of further economic weakness remains although it is far from a certainty, given monetary stimulus. Among central banks only the Fed wants to raise interest rates but it is very likely to hold off, at least until June.

For investors and traders this is more than ever a buy-low-sell-high environment.