Illustration: Rebecca Zisser/Axios

Share buybacks contributed about half of S&P 500 companies’ earnings growth in the first quarter, a new report from JPMorgan shows.

Why it matters: "This is corporate executives saying, 'Rather than investing back into the business by making capital expenditures or buying equipment, I’m just going to buy my own shares,'" says David Kelly, a global market strategist at JPMorgan Asset Management, which published the report.

  • "That says a lot about your view of the long-term prospects for your business."

Quick take: Buybacks accounted for the highest share of EPS growth since 2007, and Q1's share was almost 8 times higher than the average from 2001 to 2018, the bank found.

The big picture: S&P earnings growth has been a major worry for stock analysts this year, after 2018's blowout earnings following the passage of the Tax Cut and Jobs Act. The permanent reduction in corporate taxes was backed by President Trump and Congressional Republicans as a catalyst for a boost in wages and long-term investment.

  • While companies have slightly raised compensation and increased spending on business infrastructure and R&D, the overwhelming majority of tax cut savings has been spent by firms to buy back their own shares.
  • The trend has gotten so strong that Moody's warned in May companies were spending more on buybacks and dividends than they were paying in taxes before the cut.

Remember: Stock prices typically are tied to salaries and job performance reviews for top executives and boards, the very people making the spending decisions.

  • Companies spent more than $1 trillion buybacks last year and are on pace to spend more in 2019.
  • Earnings also were particularly low in Q1, Axios' Felix Salmon points out, making the increased level of buybacks an even larger percentage.

The last word: JPM's Kelly says the rising level of stock buybacks is one major reason he and other market analysts are worried about continued growth of business output, stock prices and the broader economy.

  • "This is probably one of the bigger issues that we’ve been talking about."
  • "It could perpetuate the slower growth environment we’ve seen in this expansion."

Go deeper: Too much money (and too few places to invest it)

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