The $700 Billion Shift | Andy Constan on What Happens When Buybacks Turn into Issuance

Andy Constan opens by discussing a $700 billion shift in net share supply from reduction (buybacks) to issuance, representing a fundamental change in market dynamics. He explains that buybacks reduce available shares for investors while issuance increases them, creating either tailwinds or headwinds depending on market conditions.

Regarding the SpaceX IPO, Constan emphasizes that IPOs serve a critical market function by connecting those needing capital with those having capital. He argues a successful IPO balances the interests of multiple constituencies: issuers, early investors/shareholders, employees, underwriters, regulators, and public investors. In SpaceX's case, pricing at $135 with opening at $150 and trading into the $170s represented a well-executed deal that satisfied stakeholders without leaving excessive money on the table. He notes that SpaceX was aggressive in price-setting and that issuing only 4% of the company at IPO meant the company could accept some appreciation to signal quality without material concern. The IPO created thousands of millionaires among employees and contractors.

Constan details the cause of the shift from buybacks to issuance: massive capex spending by hyperscalers on AI infrastructure. Companies like Google, Meta, and others have canceled or reduced buybacks, increased restricted stock unit compensation to employees, and begun issuing both corporate bonds and equity to fund trillion-dollar annual capex commitments. Even Nvidia, which increased buybacks, simultaneously increased RSU awards, resulting in net neutral share count changes. This capex is the driver of all financial engineering changes across the tech sector.

On the fundamental question of whether AI capex will pay off, Constan articulates two possible macro outcomes: (1) disinflationary productivity growth where companies produce more output for the same cost without job losses, allowing workers to purchase the benefits of AI; or (2) cost reduction through labor displacement, which creates the problem of who will buy the output. He argues the success of AI investments depends entirely on which scenario materializes.

Constan provides historical context on productivity miracles, citing examples like the assembly line, railroads, and the internet. Each initially sparked fears of permanent job displacement, but humans' inherent desire for agency and improved living standards led to new work creation. However, he acknowledges the transition period will be messy and create societal challenges. The timeline matters: older workers may not retrain, but younger workers already are adapting to a world without traditional jobs.

On current economic conditions, Constan characterizes the economy as "pretty good," supported by two pillars: capex spending from tech companies and consumer consumption. He emphasizes that personal consumption represents 2/3 to 3/4 of GDP and notes most Americans work outside tech in normal professions. Employment remains solid partly because immigration restrictions keep the job pool flat. However, real wage growth has stagnated as workers fear AI job displacement, reducing wage leverage. Consumers have maintained spending through asset dissaving—selling homes, stocks, and other assets to fund consumption above their income, enabled by wealth effects from appreciating asset prices.

Constan warns that dissaving has limits. As assets shrink and elderly/middle-class households realize their trajectories, behavior changes and consumption declines. However, he sees no imminent end to the cycle as savings rates remain low and policy makers haven't acted to constrain the bubble.

On geopolitical risks, particularly the Ukraine war, Constan argues war-related concerns are overblown for the U.S. economy. Unlike WWII or conflicts directly affecting production capacity, regional wars have minimal lasting impact on U.S. growth and employment. Oil price movements from the war matter only at the margin; falling oil prices will simply redirect inflation from headline to core components rather than eliminating it, as consumers will redirect spending to other goods.

Regarding policy, Constan expects new Fed Chair Warsons to maintain credibility by avoiding action rather than hiking rates. He sees limited room for additional fiscal stimulus after the reconciliation bill became a "skinny bill" focused on DHS. Tariffs represent an underappreciated wildcard—current tariffs expire by July 24th and require reinstatement; the administration hasn't emphasized reimposing them, which would otherwise represent a growth headwind.

Constan's focus going forward centers on the massive issuance supply hitting markets and whether it gets absorbed, continued capex spending with unknown returns on investment, and potential Fed balance sheet changes under new leadership. He believes most issuance will likely be absorbed as long as speculative enthusiasm and AI investment tailwinds persist, but sees headwinds emerging if sentiment shifts.