The S&P 500's Economic Earnings have continued their quarter-over-quarter decline since the first quarter of 2022, with the second quarter of 2023 following this downward trend. The latest data reveals that six out of eleven sectors saw a drop in their Trailing Twelve Months (TTM) Economic Earnings from the first to the second quarter of 2023.
The Financials sector recorded the most notable quarter-over-quarter improvement in TTM Economic Earnings in the second quarter of 2023. The sector's Economic Earnings rebounded from -$21.3 billion in the first quarter to $10.4 billion in the second. However, this positive trend was not universal. The Technology sector's TTM Economic Earnings fell by 2% quarter-over-quarter in the same period, despite it still generating the highest TTM Economic Earnings among all sectors.
Contrarily, the Utilities sector ended up with the lowest TTM Economic Earnings among all sectors. The data for this analysis is based on audited financial reports available as of August 15, 2023, predominantly consisting of second-quarter 10-Qs.
Economic Earnings, which offer a more precise reflection of a business's underlying cash flows compared to GAAP earnings, are showing mixed results across various sectors. The extent of these changes varies significantly among sectors.
A significant challenge facing Economic Earnings is the rising Weighted Average Cost of Capital (WACC). Despite a slight dip from 7.3% in the first quarter to 7.1% in the second quarter of 2023, WACC has been on an upward trend since 2021 when it was at 4.7%.
Investors can safeguard their interests by closely monitoring Economic Earnings due to their ability to account for WACC fluctuations. This is particularly crucial in the current economic environment, where Economic Earnings are demonstrating a downward trend across multiple sectors.
The calculation methodology used for this analysis involves aggregating TTM data for each sector's constituents during each measurement period. This approach provides a comprehensive view of the entire sector, irrespective of market cap or index weighting, aligning with how S&P Global calculates metrics for the S&P 500.
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