Profitability & Leverage of U.S. Sectors
How concerned should investors be about rising interest rates & corporate defaults?
July 2024. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- There were divergent trends in profitability and leverage across U.S. sectors
- Energy and materials showed the best improvement, while healthcare deteriorated the most
- However, overall U.S. companies should be poised well to sustain higher interest rates
INTRODUCTION
Post our recent research article on the profitability and leverage of U.S. listed companies (read Profitability & Leverage of U.S. Stocks) some readers commented that focusing on the entire stock market might have distorted our conclusion, which was that neither the profitability nor the leverage of U.S. stocks had significantly changed over the last 20 years. Given the dramatic change in interest rates throughout that period, this was somewhat unexpected.
In this research note, we will explore the profitability & leverage of U.S. sectors.
PROFITABILITY
We focus on 10 sectors and the entire U.S. stock market consisting of all stocks with a market capitalization larger than $1 billion, which is currently a universe of approximately 2500 stocks.
We compute the median return-on-equity (ROE) and profit margins for 2004, 2014, and 2024, which highlights divergent trends in these two metrics.
The median ROE of the U.S. stock market decreased over the last two decades, but the median profit margin increased. Industrials, cyclicals, and non-cyclicals feature the highest while real estate, tech, and utilities have the lowest average ROEs. However, when looking at profit margins, tech and real estate stocks rank above average.
