A quiet but consequential shift is underway in equity markets, one that Bill O'Grady of Confluence Investment Management argues deserves more attention than it is receiving. In his August 31, 2026 Asset Allocation Bi-Weekly1, O'Grady traces the structural engine that drove four decades of equity appreciation back to a single regulatory decision, and asks what happens now that the engine may be running in reverse.
The Rule That Built the Bull
The story begins in November 1982, when the SEC enacted Rule 10b-18, creating a safe harbor for corporate share repurchases. Before that change, buybacks existed under a cloud of regulatory suspicion, treated as potential market manipulation. The rule established four conditions: a single broker per day, timing restrictions, price limits anchored to independent bids or transactions, and a daily repurchase cap set at 25% of average daily trading volume. Within those guardrails, companies were free to buy back their own shares at scale, and they did.
Federal Reserve data captures the magnitude of the shift. Prior to 1982, only "19% of quarters registered negative flows" in corporate equity issuance, meaning companies were net issuers of shares in most periods. After the rule change, that figure inverted sharply, rising to "81%" of quarters showing negative flows as buybacks consistently exceeded new issuance. What followed was a structural, multi-decade reduction in equity supply that provided a persistent bid underneath share prices.
The rule change did not operate in isolation. It coincided with the rise of the shareholder primacy movement, the philosophical framework that placed owner returns at the center of corporate decision-making. Management compensation increasingly incorporated equity stakes, aligning executive incentives with stock price performance. The effect was self-reinforcing: executives whose wealth was tied to share prices had every reason to favour buybacks over retained earnings or capital investment, and for decades the math worked in shareholders' favour.
The Buyback calculus also tilted on tax grounds. Dividends face what O'Grady describes as "double taxation," taxed once at the corporate level and again at the shareholder level. Buybacks carry no equivalent burden. By reducing shares outstanding, repurchases theoretically increase per-share value without triggering a taxable event for investors who do not sell. From a capital allocation perspective, the case for buybacks over dividends was structurally compelling.
The AI Investment Surge Changes the Equation
What O'Grady identifies as the emerging risk is not a collapse in corporate earnings or a macro shock. It is a supply-side shift. The surge in artificial intelligence investment is absorbing capital that would otherwise flow toward repurchases. Companies funding AI infrastructure, data centre build-outs, and model development are issuing equity to finance that growth, reversing the flow that sustained the buyback era. O'Grady notes that historically, periods when "cumulative buybacks slowed" have correlated with market stalls, a pattern now worth watching closely.
The pipeline of anticipated initial public offerings adds to the supply pressure. SpaceX, Anthropic, and OpenAI are among the names expected to access public markets, each representing a significant draw on investor capital. Individually, each IPO is an event. Collectively, they represent a structural increase in equity supply arriving into a market accustomed to a persistent supply deficit.
What to Do About It
O'Grady is measured in his conclusions. The analysis does not call for a bear market or a wholesale exit from equities. Instead, it points toward diversification within the asset class, specifically into segments the market has systematically underweighted during the buyback era: value equities and international equities. These areas have historically offered cheaper valuations and, in the current environment, carry less exposure to the dynamics that may create headwinds for large-cap U.S. growth stocks most dependent on buyback activity.
Five Key Takeaways for Advisors and Investors
1 The 1982 SEC rule change created the structural foundation for the modern buyback era, and understanding it helps explain four decades of equity market behaviour.
2 The shift in corporate capital allocation toward AI investment is reducing the buyback impulse that suppressed equity supply for a generation.
3 Anticipated large-scale IPOs from private technology firms will add meaningfully to equity supply, creating a cumulative headwind for markets.
4 Historical data shows that periods of slowing buyback activity have correlated with equity market stalls, a relationship worth monitoring in current positioning.
5 Diversification into value and international equities represents a disciplined response to rising supply risk, without requiring a bearish macro call.
Footnote:
1 O'Grady, Bill. "Asset Allocation Bi-Weekly: The Impact of New Equity Supply." Confluence Investment Management, 31 Aug. 2026, https://www.confluenceinvestment.com/asset-allocation-bi-weekly-aug-31-2026/.
