Trailing-twelve-months (TTM) Economic Earnings for the NC 2000[1], our All Cap Index, have been falling quarter-over-quarter (QoQ) since 1Q22. 2Q23 was no different.
At the sector level, there are still mixed signals to be sure. Economic earnings are rising for some sectors and falling in others, and the magnitude of change varies by a wide margin. Trailing TTM Economic Earnings in 2Q23 were lower than 1Q23 TTM levels for six of eleven sectors.
This report is an abridged and free version of All Cap Index & Sectors: Economic Earnings Continue to Fall in 2Q23, one of our quarterly reports on fundamental market and sector trends. The full reports are available to our Professional and Institutional members or can be purchased below.
The full version of this report analyzes the economic earnings[2] (which adjust for unusual items on both the income statement and balance sheet) and GAAP earnings for the NC 2000 and its sectors (last quarter’s analysis is here).
Economic earnings provide a more accurate measure of the true underlying cash flows of businesses than GAAP earnings. Reports on the drivers of economic earnings are here.
This report leverages our cutting-edge Robo-Analyst technology to deliver proven-superior[3] fundamental research and support more cost-effective fulfillment of the fiduciary duty of care.
Economic Earnings Fall Further in 2Q23
See Figure 1 in the full version of our report for the chart of Economic Earnings vs. GAAP earnings for the NC 2000 and each of its eleven sectors from December 1998 through 2Q23.
The NC 2000’s falling Economic Earnings are the continuation of a trend we foresaw in our 1Q22 report All Cap Index & Sectors: 1Q22’s Soaring Economic Earnings Aren’t Sustainable. Indeed, a major headwind facing Economic Earnings is a rising weighted average cost of capital (WACC).
Investors can protect themselves by paying closer attention to Economic Earnings, which account for the effects of changes to WACC.
Key Details on Select NC 2000 Sectors
The Financials sector saw the largest QoQ improvement in TTM Economic Earnings. More details in the full report.
The Technology sector’s TTM Economic Earnings fell by 3% QoQ in 2Q23, though it generates the highest TTM Economic Earnings of any sector. On the flip side, the Utilities sector has the lowest TTM Economic Earnings and was one of six sectors that destroyed shareholder value in 2Q23.
Below, we highlight the Industrials sector. See the full version of this report for the same details on every sector.
Sample Sector Analysis[4]: Industrials
Figure 1 shows Economic Earnings for the Industrials sector, at $22.9 billion, rose 51% QoQ in 2Q23, while GAAP earnings, at $195.3 billion, rose 2% over the same time.
Figure 1: Industrials Economic Earnings Vs. GAAP: 4Q98 – 2Q23
Sources: New Constructs, LLC and company filings.
Our economic earnings analysis is based on aggregated TTM data for the sector constituents in each measurement period.
The August 15, 2023 period incorporates the financial data from calendar 2Q23 10-Qs, as this is the earliest date for which all of the calendar 2Q23 10-Qs for the NC 2000 constituents were available.
This article was originally published on September 7, 2023.
Disclosure: David Trainer, Kyle Guske II, Italo Mendonça, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.
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Appendix: Calculation Methodology
We derive the economic earnings and GAAP earnings metrics above by summing the Trailing Twelve-Month individual NC 2000 constituent values for economic earnings and GAAP earnings in each sector for each measurement period. We call this approach the “Aggregate” methodology.
The Aggregate methodology provides a straightforward look at the entire sector, regardless of market cap or index weighting and matches how S&P Global (SPGI) calculates metrics for the S&P 500.
[1] The NC 2000 consists of the largest 2000 U.S. companies by market cap in our coverage. Constituents are updated on a quarterly basis (March 31, June 30, September 30, and December 31). We exclude companies that report under IFRS and non-U.S. ADR companies.
[2] This report is based on the latest audited financial data available, which is the 2Q23 10-Q in most cases. Price data as of 8/15/23.
[3] Our research utilizes our more of reliable fundamental data, as proven in Core Earnings: New Data & Evidence, written by professors at Harvard Business School (HBS) & MIT Sloan and published in The Journal of Financial Economics.
[4] The full version of this report provides analysis for all eleven sectors.