Downward Trend Continues In 2Q23

Trailing-twelve-months (TTM) Economic Earnings for the S&P 500 have been falling quarter-over-quarter (QoQ) since 1Q22. 2Q23 was no different.

At the sector level, there are mixed signals to be sure. Economic earnings are rising for some sectors, and falling in others, and the magnitude 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 version of S&P 500 Economic Earnings: Downward Trend Continues In 2Q23, one of my quarterly series on fundamental market and sector trends. 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.

Economic Earnings provide a more accurate measure of the true underlying cash flows of businesses than GAAP earnings.

Economic Earnings Fall in 2Q23

The S&P 500’s falling Economic Earnings are the continuation of a trend I foresaw in my 1Q22 report S&P 500 Economic Earnings Set Records, but WACC Is a Drag. Indeed, a major headwind facing Economic Earnings is a rising WACC. WACC for the S&P 500 sits at 7.1% in 2Q23, which is down from 7.3% in 1Q23, but well above the 5.7% in 2Q22 and 4.7% in 2Q21.

Investors can protect themselves by paying closer attention to Economic Earnings, which account for the effects of changes to WACC.

Key Details on Select S&P 500 Sectors

The Financials sector saw the largest QoQ improvement in TTM Economic Earnings, which rose from -$21.3 billion in 1Q23 to $10.4 billion in 2Q23.

The Technology sector’s TTM Economic Earnings fell by 2% 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 of any sector and was one of six sectors that destroyed shareholder value in 2Q23.

Below, I highlight the Financials sector, which saw the largest QoQ improvement in TTM Economic Earnings in 2Q23.

Sample Sector Analysis: Financials

Figure 1 shows Economic Earnings for the Financials sector rose from -$21.3 billion in 1Q23 to $10.4 billion in 2Q23, while GAAP earnings rose from $231.3 billion to $310.3 billion over the same time.

Figure 1: Financials Economic Earnings Vs. GAAP: 2004 – 2Q23

My Economic Earnings analysis is based on aggregated TTM data for the sector constituents in each measurement period.

The August 15, 2023 measurement period incorporates the financial data from calendar 2Q23 10-Qs, as this is the earliest date for which all the calendar 2Q23 10-Qs for the S&P 500 constituents were available.

Disclosure: David Trainer, Kyle Guske II, Italo Mendonça, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.

Appendix: Calculation Methodology

I derive the economic earnings and GAAP Earnings metrics above by summing the Trailing Twelve Month individual S&P 500 constituent values for economic earnings and GAAP Earnings in each sector for each measurement period. I 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.