NEW YORK — It’s the narcissist rally.
Sure, there are plenty of forces pushing stocks higher — record earnings, small investors buying again, signs the US economy may be strengthening, central banks flooding the financial system with money.
But you may want to spare a thought, and a healthy dose of worry, for what is one of the biggest, and least appreciated, reasons for the rally: buybacks.
Flush with cash and a world of opportunity at their doorstep, companies have decided there’s nothing more attractive than themselves. So, they’re offering big money to buy back their own stock. This year, big US companies have given the go-ahead for $286 billion of buybacks, up 88 percent from the same period last year, according to Birinyi Associates, a research firm. If the pace continues this year, the tally will exceed the record set in 2007.
Investors like buybacks because they suggest companies think their stock is cheap. They also help reduce the number of shares outstanding, which increases earnings per share. And higher earnings per share often, though not always, lead to rising stock prices.
But buybacks are also crucial to the rally for a reason that’s not widely known. Companies are one of the few big stock purchasers now. Nearly every other big player in the market has been selling more than they’ve been buying.
However much they spend, each dollar of buybacks appears to be having a greater effect on raising the prices of certain stocks. That’s because fewer shares are changing hands.
Stocks move up for many reasons, so the exact impact on prices of stocks when companies buy their shares is unclear. In any event, the total amount of buybacks doesn’t appear to be enough to have a big effect on the whole market.
But some on Wall Street are worried.
Gregory Milano, CEO of consultancy Fortuna Advisors, has run studies showing that companies that spend the most on buying back their own stock tend to underperform because they don’t spend enough on opening new factories, research, or otherwise building their business.
Another problem is that buybacks can give investors a false sense of a company’s true earnings power.
The dilemma facing buyback skeptics who are thinking of selling is the same one facing those worried the rise in the market has come mostly from the Federal Reserve efforts to stimulate the economy. ‘‘Don’t fight the Fed,’’ the old Wall Street saw goes.
To which should perhaps be added, ‘‘Don’t buck the buybacks.’’