U.S. companies are cutting share buybacks to conserve cash in the face of economic uncertainty, which threatens to add another weight to the equity market’s attempted rebound. 

S&P 500 Index firms bought back just over $200 billion of their own shares during the third quarter, marking the slowest quarter for repurchases since the middle of last year and coming in roughly 25% below the levels seen in late 2021 and early 2022, according to data compiled by Bloomberg.

The pullback chips away at what had been a major force in lifting the stock market over the past two years as corporations used surging profits to buy back their own shares. If the trend continues, it would create another headwind for the S&P 500, which is still down 16% this year even after rallying back sharply from its mid-October low.

“Buybacks can be a significant driver of market returns, especially in the large cap sector,” said Phil Blancato, the chief executive officer at Ladenberg Thalmann Asset Management. “This would be another component of softer returns for 2023.”

The communication-services industry was among the biggest decliners in share repurchases during the third quarter, with companies such as Facebook owner Meta Platforms Inc. seeing revenue drop as businesses scale back on digital advertising. Consumer discretionary and technology companies including Amazon.com Inc. and Microsoft Corp. also reduced their buybacks, outweighing an increase from the energy sector.

The moves reflects mounting anxiety that growth will stall because of the Federal Reserve’s most aggressive interest-rate hikes since the 1980s. It also signals an effort to prioritize spending, with companies seeking to protect dividend payments, which rose 9% to nearly $600 billion over the past year.

Already, some companies are trying to figure out how best to slice up a shrinking cash pie. Goldman Sachs Group Inc. Chief Executive Officer David Solomon said this month that management teams have to prepare for “bumpy times ahead,” and several big banks recently joined technology giants like Meta and Amazon.com in reducing their payrolls. 

Morgan Stanley is cutting about 1,600 jobs, or about 2% of its global workforce. And Goldman plans to eliminate hundreds of jobs, moving beyond its annual weeding out of underperforming workers.

Buybacks are a far less disruptive cost to cut than headcount. With the housing market hit by rising rates, RH, the luxury furniture maker, repurchased 87% fewer shares in the third quarter than in the second quarter, according to regulatory filings. When asked about the decision on the company’s Dec. 8 earnings call, CEO Gary Friedman said it was a prudent way to brace for a slowdown. 

“When you’re going into a kind of a storm that you haven’t seen before, you don’t want to spend all your fuel before you can see the shore,” he said. “When we have a better view of the shore then we’ll make the right decisions.”

—With assistance from Tom Contiliano.

This article was provided by Bloomberg News.