Financial term S&P 500
written in shiny silver golden repeating words.
Trailing-twelve-month (TTM) return on invested capital (ROIC) for the S&P 500 fell quarter-over-quarter (QoQ) in 2Q23.
The continuing decline suggests that the corporate sector of the economy is slowing. More importantly, tepid earnings forecasts for 2H23 suggest that ROIC will not move materially higher from current levels for the foreseeable future.
I think ROIC for the S&P 500 peaked in 2Q22.
Despite the overall decline, seven out of eleven S&P 500 sectors saw a QoQ rise in ROIC in 2Q23. However, the rise in ROIC in these sectors was small relative to the sectors with declining ROIC.
The decline in the S&P 500’s ROIC comes from a deterioration in net operating profit after tax (NOPAT) margins while invested capital turns remained flat.
This report is an abridged version of S&P 500 & Sectors: ROIC Keeps Falling In 2Q23, one of my quarterly reports 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 is as of 8/15/23.
Calculated using SPGI’s methodology, which sums individual S&P 500 constituent values for NOPAT and invested capital. See Appendix III for more details on this “Aggregate” method and Appendix I for details on how I calculate WACC for the S&P 500 and each of its sectors.
S&P 500 ROIC Falls in 2Q23
The S&P 500’s ROIC every quarter over the last twenty years. I provide the same analysis for S&P 500’s NOPAT margin and invested capital turns.
Key observations:
- I’ve previously noted the “record” return on invested capital of 2Q22 was a mirage and that the bullish trend in ROIC could reverse soon. As I see in 2Q23, margins and ROIC for the S&P 500 continue to fall further from those record highs.
- Companies continue to note that margins will be pressured in 2023, which could drive ROIC even lower.
- WACC for the S&P 500 decreased QoQ for the first time after previously increasing QoQ in eight consecutive quarters. The high cost of capital threatens investor confidence in the viability of many weaker companies, several of which I’ve highlighted in my Zombie Stocks reports.
- Beneath the surface, performance by sector is all over the map. Per Figure 2, some sectors saw ROIC rise while others saw it fall. Digging deeper and looking at the drivers of ROIC, NOPAT margins and invested capital turns, I see wildly different results in different sectors. This variance signals a lot of churn at the company level, which I expect will weed out many weaker companies throughout the remainder of 2023.
Key Details on Select S&P 500 Sectors
Seven sectors saw a quarter-over-quarter (QoQ) increase in ROIC. The Consumer Cyclicals sector performed best in the second quarter of 2023 as measured by change in ROIC, with its ROIC rising 24 basis points from 1Q23.
The biggest loser in the second quarter was the Energy sector. ROIC for the Energy sector declined 237 basis points QoQ in 2Q23.
Sample Sector Analysis: Energy
Figure 1 shows the Energy sector’s ROIC fell from 13.2% in 1Q23 to 10.8% in 2Q23. The Energy sector’s NOPAT margin fell from 15.4% in 1Q23 to 13.9% in 2Q23, while invested capital turns fell from 0.86 in 1Q23 to 0.78 in 2Q23.
Figure 1: Energy ROIC vs. WACC: December 2004 – 8/15/23
The August 15, 2023 measurement period uses price data as of that date for my WACC calculation and incorporates the financial data from 2Q23 10-Qs for ROIC, as this is the earliest date for which all the 2Q23 10-Qs for the S&P 500 constituents were available.
Figure 2: Energy NOPAT Margin vs. IC Turns: December 2004 – 5/15/23
The August 15, 2023 measurement period uses price data as of that date for my WACC calculation and incorporates the financial data from 2Q23 10-Qs for ROIC, as this is the earliest date for which all the 2Q23 10-Qs for the S&P 500 constituents were available.
The Aggregate methodology provides a straightforward look at the entire sector, regardless of market cap or index weighting. The methodology matches how S&P Global (SPGI) calculates metrics for the S&P 500.
For additional perspective, I compare the Aggregate method for ROIC with two market-weighted methodologies: market-weighted metrics and market-weighted drivers. Each method has its pros and cons, which are detailed in the Appendix.
Figure 3: Energy ROIC Methodologies Compared: December 2004 – 8/15/23
The August 15, 2023 measurement period uses price data as of that date for my WACC calculation and incorporates the financial data from 2Q23 10-Qs for ROIC, as this is the earliest date for which all the 2Q23 10-Qs for the S&P 500 constituents were available.
Disclosure:
David Trainer, Kyle Guske II, Italo Mendonca, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.
Denial of responsibility! Vigour Times is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
