S&P 500 Economic Earnings Set Records, But WACC Is A Drag

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Economic earnings increased year-over-year (YoY) for all but one sector through the trailing-twelve-months (TTM) ended 1Q22.[1]

This report is an abridged version of S&P 500 Economic Earnings Set Records, but WACC is a Drag, one my quarterly series on fundamental market and sector trends.

Economic earnings provide a more accurate picture of the true underlying cash flows of a business than GAAP earnings.

Economic Earnings Rise to New Highs in 1Q22

Economic earnings for the S&P 500 rose from $537.5 billion in 1Q21 to $933.7 billion in 1Q22, while GAAP Earnings rose from $1.2 trillion to $1.8 trillion over the same time. Economic and GAAP earnings are at their highest levels since 2004, which is the earliest my analysis is available.

However, the S&P 500’s soaring economic earnings are likely to reverse trend soon, as I detail in S&P 500 & Sectors: ROIC Hits New Peak, but Can It Last?.

Indeed, a major headwind facing economic earnings is a rising WACC, which in the first quarter added $84.5 billion to the cost of capital. Inflation tends only to boost GAAP earnings, and investors can protect themselves from such false signals by paying closer attention to economic earnings. This measure accounts for expected inflation, as reflected in the firm’s WACC.

Key Details on Select S&P 500 Sectors

Ten of eleven S&P 500 sectors saw a YoY improvement in economic earnings.

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The Energy sector saw the largest YoY improvement, $138.6 billion, in economic earnings, which rose from -$93.1 billion in 1Q21 to $45.6 billion in 1Q22.

The Technology sector generates the most economic earnings of any sector and grew economic earnings by 31% YoY in 1Q22. On the flip side, the Utilities sector has the lowest economic earnings and was the only sector to see a YoY decline in economic earnings in 1Q22.

Below, I highlight the Healthcare sector which saw economic earnings improve by $54.2 billion YoY in 1Q22.

Sample Sector Analysis: Healthcare

Figure 1 shows economic earnings for the Healthcare sector, at $173.9 billion, rose 45% YoY in 1Q22, while GAAP earnings, at $225.4 billion, rose 54% over the same time.

Figure 1: Healthcare Economic Earnings Vs. GAAP: 2004 – 1Q22

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

The May 16, 2022 measurement period incorporates the financial data from calendar 1Q22 10-Q, as this is the earliest date for which all the calendar 1Q22 10-Qs for the S&P 500 constituents were available.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler 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.

[1] This report is based on the latest audited financial data available, which is the 1Q22 10-Q in most cases. Price data as of 5/16/22.