Fair weather outlook

Returns to investors

Realised cash returns from equities can come in the form of dividend payments, buybacks, and cash offers for shares as part of a merger or acquisition transaction. 

Unrealised gains are determined by how share prices respond to corporate profits and what valuation multiple investors are willing to put on expected future earnings. 

In recent years, share buybacks have been an important part of total returns to US equity investors. Net equity issuance (new issues from initial public offerings and other operations minus buybacks and the effect of M&A) has been negative in most quarters since 2021 for the S&P 500 index. 

Companies have had sufficient free cash flow to allow them to return excess capital to investors, along with dividend payments. This theme has been key to the equity bull market and remains a strong theme.

In Q1 2026, net buybacks and dividend payments amounted to $425 billion. In the year to end-March, these cash returns were equivalent to a yield on capitalisation of the market of 2.5%. 

It goes without saying that the bulk of the overall total return of the S&P 500 index was from increased share prices driven by a booming earnings cycle. 

However, it should be noted that a dividend yield of just above 1.0% for the S&P 500 means income is not really the focus for US equity investors. It is more about growth and the opportunity for investors to benefit from significant capital gains, with some of that returned in cash on a regular basis. 

Interestingly, many of the biggest companies have reduced their number of shares outstanding in recent years (Apple, Netflix, and Nvidia, for example) although Google owner Alphabet recently bucked the trend by issuing new equity amounting to around $80 billion.

Give and take

The cash flow picture will have changed a little in Q2 given the increase in IPO activity. Capital spending has increased too, reducing free cash flow available for share buybacks. Net equity issuance is estimated to have been much less negative and possibly positive for the first time since 2021, although dividend payments are expected to have been strong. 

The SpaceX IPO was the biggest flotation in history, representing a huge call on investor cash. Thankfully, price returns have remained strong with the S&P 500 index up 14.9% over the quarter. Still, cash returns to investors remain much lower compared to mark-to-market total returns.

Cash calls but strong earnings growth

When we also consider net corporate bond issuance of around $460 billion in Q1 (according to Federal Reserve data) and an estimated gross issuance of US investment-grade corporate debt of $500-$550 billion in Q2 (according to market sources), there is a hugely increased claim on capital (investors providing cash to corporates). 

The last quarter might be a one-off, but it seems that capex on artificial intelligence is going to remain on a rising trend, thereby requiring funding. And that funding will come through a combination of more potential equity issuance, the natural growth in available savings, foreign investors, leveraged borrowing, or the sale of other assets. 

It is not unreasonable to question how sustainable this is without some evidence of tightening liquidity or pressure on equity valuations.

The mitigation of these risks is the market’s confidence in continued strong earnings growth. As of the end of June, the consensus amongst equity analysts was for earnings per share growth of 21.7% for the S&P 500 and 36.5% for the Nasdaq index. 

This confidence in ongoing US equity performance has rarely been surpassed. If earnings growth is that strong, companies will have more choice to fund capital spending through retained earnings and potentially still have excess capital to distribute in dividends and share purchases. 

The IT sector is forecast to deliver 42% earnings growth over the next 12 months – a realisation of which would comfortably justify the price-earnings ratio of 22 times.

From the City to Miami

In the short term the two big tests for US equities will be the Q2 earnings season and the Fed’s policy decision at the end of July. 

Unless June inflation data is shocking, the Fed looks likely to keep rates on hold until at least September and perhaps for the rest of the year. June’s labour market and manufacturing purchasing managers’ data eased relative to May and there is no sign of the jobs market overheating, with wage growth remaining stable around 3.5%. 

Stable rates and good corporate earnings remain very supportive for credit markets.

I was lucky enough to be in Miami for a week to experience the World Cup on the ground (my status being Scottish via marriage and an adjunct member of the Tartan Army). As expected, Scotland lost to Brazil and were knocked out of the tournament. However, my observations of what is admittedly a bit of an economic bubble (Miami full of soccer fans from all over the world) was that the US economy is doing very well and does not need lower interest rates. The market, however, will be sensitive to the overheating narrative, and pricing in hikes rather than cuts is likely to be the road ahead for bond markets.

The trend of equity buybacks may have stalled but widespread dilution of equity ownership is highly unlikely. The net issuance we are seeing is because of new share capital being raised to support AI and related activities. 

This should not be a cause for concern even if there are disruptive short-term cash flow implications. The general trend towards lower numbers of shares outstanding continues across many sectors in the US.

Coming home

Finally, a word on the UK, as the country faces yet another change in political leadership. So far, the gilt market has responded favourably to Prime Minister-in-waiting Andy Burnham’s commitment to respect the fiscal rules. 

His agenda is pro-growth and increased investment in housing, regional development, and fiscal help for small businesses have already been touted. The UK needs growth, that much is clear. 

Balancing policies that encourage growth (and that will require some spending) with containing borrowing will be challenging, and a lot will depend on communications, the quality of which has been lacking under the current government. 

A period of more confidence in government should not only be supportive for gilts but could also help revive interest in UK equities, particularly amongst UK investors who have increasingly sent capital overseas in recent years. 

The FTSE 350 index has a price-earnings ratio of just 0.6 of that of the S&P 500 – some 10 years ago the indices’ valuation was close to 1:1. UK earnings growth is forecast at around 12% and the market has a dividend yield of above 3%. 

Lower UK rates over the next year, a further easing of trade frictions with the EU, and a recognition of the need to address the UK’s structural problems (welfare spending, pensions and low productivity) would be the ideal scenario for UK markets. 

Let’s see if the King of the North can deliver.

Performance data/data sources: LSEG Workspace DataStream, ICE Data Services, Bloomberg, BNP Paribas AM, as of 3 July 2026, unless otherwise stated). Past performance should not be seen as a guide to future returns.