Economic profits declined on a quarterly (quarterly) basis for eight of the eleven sectors during the subsequent twelve months (TTM) ending in the second quarter of 2000, which is my company’s All Cap Index. NC 2000 consists of the 2000 largest US companies by market capitalization in my company coverage. Components are updated on a quarterly basis (March 31, June 30, September 30, and December 31). I exclude companies that report under International Financial Reporting Standards (IFRS) and non-US companies for dispute resolution (ADR).
This report is a condensed version of the All Sectors and Sectors Index: Economic Profits Lower than the Previous Record in Q222, and it is one of my two quarterly reports on core market and sector trends.
Economic earnings provide a more accurate picture of a company’s true underlying cash flows than GAAP earnings. This report is based on the most recent available audited financial statements, which are 2Q22 10-Q in most cases. Pricing data as of 8/12/22.
Economic Profits Decline in the Second Quarter of 22
NC 2000500’s economic profit fell from $994.6 billion in the first quarter of 22 to $972.6 billion in the second quarter of 22, while GAAP profits fell from $2.1 trillion to $2.0 trillion at the same time. Although lower in the quarter, economic earnings and GAAP gains remain close to record highs in absolute terms.
NC 2000’s high economic earnings slumped on a quarterly basis, a trend I likely flagged in my Q2 22 All Cap Index & Sectors: 1Q22 economic high was not sustainable. Indeed, the main headwind to economic gains is higher average costs of capital (WACC). Inflation boosts GAAP but these gains are erased in economic profits because of the higher cost of capital.
Key details in locating NC 2000 segments
The energy sector saw the biggest quarterly improvement, $67.9 billion, in economic profit, which rose from $36.7 billion in the first quarter of 22 to $104.6 billion in the second quarter of 22.
The technology sector generates the most economic profits of any sector, but its economic profits fell by 5% q/q in Q222. On the other hand, the utilities sector recorded the lowest economic profits and was one of the eight sectors that saw a quarterly decline in Economic profits in the second quarter of the year 22.
Below, I highlight the industries sector that saw an improvement in economic profits by $2.4 billion qoq in Q222.
Sector Analysis Sample: Industries
Figure 1 shows economic profits for the industries sector, at $49.3 billion, up 5% q/q in Q222, while GAAP earnings, at $163.1 billion, were flat during the same time.
Figure 1: Economic Gain for Industries vs. Economic Gain GAAP: 4Q98 - 2Q22
My economic profit analysis is based on TTM data collected for the components of the sector in each measurement period.
The August 12, 2022 period includes financial data from the 2Q22 10-Q calendar, as this is the earliest date all 2Q22 10-Q calendars for the NC 2000 components were available.
Disclosure: David Trainer, Kyle Guske II, Matt Shuler, and Brian Pellegrini receive no compensation for writing for any particular stock, style, or topic.
Appendix: Calculation Methodology
Derive the above economic earnings and GAAP earnings measures by summing the individual NC 2000 component values of twelve twelve-month economic earnings and GAAP earnings in each sector for each measurement period. I call this approach the "clustering" methodology.
The aggregation methodology provides a direct view of the entire sector, regardless of market capitalization or index weighting, and matches S&P Global (SPGI)'s method of calculating S&P 500 metrics.