AI and Buybacks: A Trillion-Dollar Puzzle

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So, Wall Street is awfully excited about artificial intelligence, which is perfectly understandable. It’s the sort of thing that promises to change everything, and as anyone who’s ever seen a science fiction film knows, that usually involves a lot of blinking lights and slightly alarming robots. But amidst all the talk of generative AI and large language models, it turns out there’s another, rather substantial, spending spree going on. And it involves, well, companies buying themselves. Which, when you think about it, is a bit like a dog chasing its own tail, except with considerably more zeroes attached.

Four tech behemoths – Alphabet (Google, to its friends), Meta (formerly Facebook, still confusing some people), Microsoft, and Amazon – are collectively gearing up to spend close to $700 billion by 2026 on building out the data centers that will house all this artificial intelligence. That’s a colossal sum, enough to build a small country, or at least a very well-equipped server farm. These companies, you see, have stumbled upon the enviable position of generating vast amounts of cash from their existing businesses – Google’s near-monopoly on search, Meta’s mastery of social distraction, Microsoft’s enduring grip on office software, and Amazon’s relentless domination of online shopping and cloud services – which allows them to fund these ambitious, futuristic projects.

But here’s the curious thing: it turns out that these hyperscalers, as they’re known, are actually being outspent on another, rather less glamorous, endeavor. S&P 500 companies, as a whole, are on track to spend over a trillion dollars this past year buying back their own stock. A trillion! That’s a number that requires a moment to fully absorb. It’s the equivalent of, oh, I don’t know, roughly 1.4 billion copies of a reasonably priced paperback. Or, if you prefer, enough to fund a very lengthy space voyage. It’s a staggering amount of money to essentially give back to shareholders, and it raises a few questions.

The late, great Warren Buffett, a man who knew a thing or two about investments, once observed that the best investment you can make is in yourself. And in a way, that’s what these companies are doing. But it’s a rather peculiar form of self-improvement. By reducing the number of shares outstanding, they artificially inflate earnings per share, making the company look more attractive to investors. It’s a bit like standing on a box to appear taller. It works, sort of, but doesn’t actually change your fundamental stature.

There are a couple of reasons why this is happening. Firstly, the stock market is, let’s face it, rather expensive at the moment. The Shiller P/E ratio, a measure of market valuation, is near its all-time high. In other words, stocks are pricey. So, companies feel pressured to justify those valuations. And buying back stock is a relatively easy way to do that. It’s a bit like rearranging the furniture to make a small room look bigger.

Secondly, many companies issue stock options to executives and employees. This is a common practice, but it dilutes the ownership of existing shareholders. So, to offset this dilution, companies buy back shares. It’s a bit like filling a leaky bucket. You keep pouring water in, but you also have to bail some out. It’s a never-ending cycle, really.

Now, don’t misunderstand me. Artificial intelligence is undoubtedly a transformative technology. It has the potential to revolutionize everything from healthcare to transportation. But it’s also important to remember that companies are ultimately driven by profit. And sometimes, the most profitable thing to do is simply to buy back your own stock. It’s not glamorous, it’s not particularly innovative, but it gets the job done. And in the grand scheme of things, that’s often all that matters.

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2026-03-16 14:42