Economic Earnings Fall From Prior Record In 2Q22

Economic earnings fell quarter-over-quarter (QoQ) for eight of eleven sectors through the trailing-twelve-months (TTM) ended 2Q22 for the NC 2000, my firm’s All Cap Index. The NC 2000 consists of the largest 2000 U.S. companies by market cap in my firm’s coverage. Constituents are updated on a quarterly basis (March 31, June 30, September 30, and December 31). I exclude companies that report under IFRS and non-U.S. ADR companies.

This report is an abridged version of All Cap Index & Sectors: Economic Earnings Fall From Prior Record in 2Q22, one of my quarterly reports 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. This report is based on the latest audited financial data available, which is the 2Q22 10-Q in most cases. Price data as of 8/12/22.

Economic Earnings Fall in 2Q22

Economic earnings for the NC 2000 500 fell from $994.6 billion in 1Q22 to $972.6 billion in 2Q22, while GAAP Earnings fell from $2.1 trillion to $2.0 trillion over the same time. Despite falling in the quarter, economic and GAAP earnings remain near record high levels in absolute terms.

The NC 2000’s soaring economic earnings fell quarter-over-quarter, a trend I noted was likely in my 1Q22 report All Cap Index & Sectors: 1Q22’s Soaring Economic Earnings Aren’t Sustainable. Indeed, a major headwind facing economic earnings is a rising WACC. Inflation boosts GAAP but these gains are erased in economic earnings by a higher cost of capital.

Key Details on Select NC 2000 Sectors

The Energy sector saw the largest QoQ improvement, $67.9 billion, in economic earnings, which rose from $36.7 billion in 1Q22 to $104.6 billion in 2Q22.

The Technology sector generates the most economic earnings of any sector, but its economic earnings fell by 5% QoQ in 2Q22. On the flip side, the Utilities sector has the lowest economic earnings and was one of eight sectors to see a QoQ decline in economic earnings in 2Q22.

Below, I highlight the Industrials sector which saw economic earnings improve by $2.4 billion QoQ in 2Q22.

Sample Sector Analysis: Industrials

Figure 1 shows economic earnings for the Industrials sector, at $49.3 billion, rose 5% QoQ in 2Q22, while GAAP earnings, at $163.1 billion, were flat over the same time.

Figure 1: Industrials Economic Earnings Vs. GAAP: 4Q98 – 2Q22

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

The August 12, 2022 period incorporates the financial data from calendar 2Q22 10-Q, as this is the earliest date for which all the calendar 2Q22 10-Qs for the NC 2000 constituents were available.

Disclosure: David Trainer, Kyle Guske II, Matt Shuler, and Brian Pellegrini 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 NC 2000 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.