Price-to-Earnings ratios have been a trusted metric used by Financial Analysts for decades and this year, the S&P 500 has traded in the 95th percentile from data since 1900. But one’s tools have to keep up with the times…

One lesser known fact is that the S&P 500 is showing half the leverage compared to decades past, on top of lower earnings volatility. This comes from lower debt per average company and the increases to labor productivity. Potentially justifying the higher valuations as it seems they come with less volatility and more consistency.

Another tidbit that isn’t being widely reported, aggregate U.S. corporate profits reached record levels in the 4th quarter of last year; the net profit margin for companies in the S&P 500 index reached 10.7%, and the tech-heavy companies on the NASDAQ exchange reported a 23% aggregate profit over the fourth quarter.

Is this sustainable? Corporate earnings rose 9% last year, higher than the 3.3% growth in the entire economy. Generally speaking, corporate revenue grows at roughly the same rate as the economy overall, so one might expect future revenue to fall back in line. But the interesting part of the picture is that companies are paying higher wages and still generating greater profits from the products and services they offer.

At the same time, inflation is stuck at around 3%, which suggests that companies have the ability to raise their prices without much pushback from consumers and are able to increase profits even as expenses go up incrementally.

Come see Founder Sam Huszczo LIVE in sunny Florida, speaking on Fixed Income Strategies for 2024 & Beyond in the Top Link Below: