Bottom line: The liquidity tide that lifted most assets from 2020–2023 has receded; with central bank balance sheets smaller and repurchases lower, returns now hinge on cash conversion and capital discipline rather than index momentum.
Standfirst: On 9 October 2025, Reserve Bank credit stood at $6.54tn (Federal Reserve H.4.1, October 2025). In the second quarter of 2025, S&P 500 repurchases fell to $234.6bn, down 20.1% quarter‑on‑quarter (S&P Dow Jones Indices, September 2025). The structural bid for “easy beta” has weakened.
Opening
We present an original calculation of the change in the market’s implied annualised “buyback yield,” paired with a cross‑central‑bank read of balance‑sheet normalisation.
Our method combines weekly central‑bank statements with quarterly repurchase data to quantify how much mechanical support has faded, then maps the consequences to cash conversion and working‑capital intensity across markets.
From 2020–2023, abundant liquidity and record repurchases insulated indices. That regime is fading. On 9 October 2025, the Federal Reserve reported Reserve Bank credit at $6.54tn (H.4.1 Table 1; Federal Reserve, October 2025). United States M2 grew 4.8% year over year in July 2025 (H.6; Federal Reserve, August 2025). In parallel, S&P 500 companies repurchased $234.6bn of stock in the second quarter of 2025, down 20.1% from the first quarter (S&P Dow Jones Indices, September 2025).
Cash not claims is the new scarcity.
When the tide of liquidity retreats, valuation becomes a function of cash conversion rather than narrative.
Context
“Easy beta” refers to 2020–2023, when policy support, low real rates and heavy repurchases produced strong index returns despite uneven fundamentals. Liquidity here means the balance sheets of major central banks, bank credit creation and repurchases that reduce free float. Cash conversion is the share of operating profit that becomes free cash flow after working capital and maintenance capital expenditure. Buyback yield means annual repurchases divided by market value; it is not a guaranteed return.
Analysis
1) The liquidity engines are idling
Reserve Bank credit was $6.54tn on 9 October 2025 (H.4.1 Table 1; Federal Reserve, October 2025). United States M2 rose 4.8% year over year in July 2025 (H.6; Federal Reserve, August 2025). In the euro area, the Eurosystem’s consolidated financial statement for 26 September 2025 shows total assets of €6,070.8bn and base money of €4,374.2bn, reflecting ongoing quantitative tightening and maturing programmes (European Central Bank weekly statement, September 2025). Takeaway: the structural impulse from public balance sheets is weaker than in 2020–2023.
2) Mechanics beat momentum: repurchases as a market‑wide cash sink
S&P 500 companies repurchased $234.6bn of stock in the second quarter of 2025, down from a record $293.5bn in the first quarter (S&P Dow Jones Indices, September 2025). Original calculation: at a roughly $44tn S&P 500 market value mid‑2025, the quarter‑to‑quarter drop (−$58.9bn) trimmed the implied annualised buyback yield by about 0.13%‑points. Small in a quarter; material over a year because it removes a persistent bid. Takeaway: less corporate demand and higher discount rates push investors toward businesses that produce cash now.
3) Cash conversion is the fulcrum
Illustrative: consider a company with £1,000m revenue, a 20% operating margin, 75% cash conversion of operating profit and maintenance capital expenditure at 4% of sales, with working‑capital days unchanged. Free cash flow equals 0.75×£200m − £40m = £110m. At 4.0× sales (enterprise value £4,000m), the free‑cash‑flow yield is 2.75%. If valuation normalises to 2.5× sales (enterprise value £2,500m), the free‑cash‑flow yield rises to 4.40% without any operational change. In a world with thinner liquidity, buyers will pay for the second profile, not the first. Takeaway: the path from earnings to cash is the binding constraint on multiples.
4) Cross‑market read: England, United States, Portugal, China
United Kingdom: higher sovereign yields since 2022 anchor required returns; firms with weak cash conversion face higher equity costs today. United States: repurchases fell 20.1% quarter‑on‑quarter in the second quarter of 2025 and remain concentrated among the largest issuers (S&P Dow Jones Indices, September 2025). Portugal: bank lending surveys point to cautious credit conditions; equity flows are selective. China: aggregate financing momentum remains uneven amid real‑estate adjustment. Takeaway: across markets, higher required returns and patchy credit favour cash‑rich, working‑capital‑efficient models.
Incentive box (where relevant)
Private funds commonly use a preferred return of 8% with annual compounding, 100% catch‑up and 20% carried interest, assessed on a fund‑as‑a‑whole basis with clawback over a 10‑year horizon. Such terms can tilt decisions toward early distributions when liquidity is cheap; today’s thinner liquidity raises the bar for capital‑return choices.
Authority datapoint
Federal Reserve H.4.1 “Factors Affecting Reserve Balances,” Table 1 (week ended 8 October 2025) lists Reserve Bank credit at $6.54tn (Federal Reserve, October 2025). Together with United States M2 year‑over‑year growth of 4.8% in July 2025 (H.6, August 2025), this underlines the regime shift from the pandemic‑era surge.
Counterpoints and limitations
Liquidity can snap back: central banks could slow or pause balance‑sheet run‑offs; fiscal issuance can shift maturity and demand. High‑quality growth companies can sustain premium multiples even as repurchases ebb. The buyback‑yield estimate is stylised and uses aggregate market value; constituent mix and timing effects matter. Sensitivities: if 2026 repurchases rebound toward first‑quarter 2025 pace for four consecutive quarters, the mechanical demand could add ≈0.5%‑points to annualised buyback yield; if M2 growth accelerates above 7% for three months, liquidity would cushion valuations.
Risks and caveats
Jurisdiction: accounting for free cash flow differs; capitalisation versus expensing affects comparability. Liquidity: thinner depth increases gap risk. Leverage: higher net debt shortens the runway if cash conversion dips. Regulation and tax: repurchase taxes, stamp duties and sector levies alter payout mix. Assumptions: stable tax rates; maintenance capital expenditure at 4% of sales in the example; no change in working‑capital days beyond what is stated.
Markets are paying for cash today, not stories tomorrow.
What would change our mind (next 12–18 months)
- Federal Reserve and European Central Bank balance sheets stop shrinking and expand by >5% from current levels.
- S&P 500 quarterly repurchases sustain ≥$290bn for two consecutive quarters.
- United States M2 year‑over‑year growth sustained ≥7% for three consecutive months.
- Investment‑grade credit spreads compress <80bp despite weak earnings revisions.
- Median free‑cash‑flow conversion among large caps rises ≥10%‑points year over year across at least two major markets.
What it means
For an informed general investor, this is not a call to retreat to cash; it is a call to score businesses on cash mechanics first. Checklist: cash conversion ≥70%; working‑capital days falling; maintenance capital expenditure ≤4% of sales; net debt to earnings before interest, taxes, depreciation and amortisation ≤2.0×; payout flexible.
Conclusion
The 2020s “easy beta” phase was a liquidity story as much as a growth story. With central‑bank balance sheets smaller, money growth subdued and repurchases lighter, markets are rediscovering price for cash—not promises. Screening for cash conversion and capital discipline is the practical edge in the present regime.
Social snippet
Liquidity tide out, cash conversion in: why the 2020s “easy beta” has ended.
Sources
Federal Reserve — H.4.1 “Factors Affecting Reserve Balances,” Table 1 (release 9 October 2025) and H.6 “Money Stock Measures” (August 2025).
European Central Bank — “Consolidated financial statement of the Eurosystem as at 26 September 2025,” weekly statement (30 September 2025).
S&P Dow Jones Indices — “S&P 500 Buybacks: Q2 2025” (September 2025).
Compliance
Educational content only; not investment advice; outcomes vary by jurisdiction, leverage levels and market conditions; past performance not reliable; hypotheticals are illustrative.