The biggest risk to U.S. stocks in 2022 is not the Fed raising interest rates, but the imminent reduction in the amount of stock buybacks

The biggest risk to U.S. stocks in 2022 is not the Fed raising interest rates, but the imminent reduction in the amount of stock repurchases. Evercore ISI pointed out that historical data analysis shows that when the Fed raised interest rates for the first time in a tightening cycle, the S&P 500 index still performed well.

Bank of America believes that weekly buybacks by client companies rose to their highest level since March, reaching $3.4 billion, double the previous week.

Economist Lance Roberts pointed out that the greater risk facing US stocks is actually the abuse and misuse of US stock buybacks. While corporate share buybacks have been highly controversial, the extent to which they will affect financial markets remains unclear. So far, the reasons for the bullish U.S. stock market include low interest rates, low inflation, currency liquidity and zero interest rates. These seemingly reasonable factors are not all supporting the higher stock prices. The real behind the scenes is the share buyback.

Over the past 10 years, the S&P 500's return has been driven by price-to-earnings ratios of 21%, earnings per share 31.4%, dividends 7.1%, and share buybacks 40.5%.

While a surge in share buybacks may temporarily ease concerns about the end of easy monetary policy, it won't last long. Based on history, tighter monetary policy by the Federal Reserve slows down share buybacks and lowers stock market returns. With the Federal Reserve embarking on tighter monetary policy in 2022, the risk of a slowdown in stock market buybacks will increase, especially with the issuance of cheap bonds for share buybacks.