All Cap Index and Sectors: Economic Profit Drops from Earlier Record in 2Q22


Economic profits declined quarter-over-quarter (QoQ) for eight of the eleven sectors during the last twelve months (TTM) ending 2Q22 for the NC 2000, my company’s All Cap Index. The NC 2000 consists of the largest 2000 US companies by market capitalization in my company’s coverage. Items are updated quarterly (March 31, June 30, September 30, and December 31). I exclude companies reporting under IFRS and non-US ADR companies.

This report is an abridged version of All Cap Index & Sectors: Economic Earnings Fall From Prior Record in 2Q22, one of my quarterly reports on fundamental market and industry 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 audited financial data available, in most cases the 2Q22 10-Q. Price data as of 8/12/22.

Economic profit falls in 2Q22

Economic profits for the NC 2000 500 fell from $994.6 billion in 1Q22 to $972.6 billion in 2Q22, while GAAP earnings fell from $2.1 trillion to $2.0 trillion during the same time. Despite the decline in the quarter, economic and GAAP earnings remain at record highs in absolute terms.

The NC 2000’s rising economic profits declined quarter-over-quarter, a trend I noticed was probably in my 1Q22 report All Cap Index & Sectors: 1Q22’s rising economic gains are not sustainable. Indeed, a major headwind to economic profits is a rising WACC. Inflation raises GAAP, but these gains are offset in economic profit by a higher cost of capital.

Key Details on Selected NC 2000 Sectors

The energy sector saw the biggest QoQ improvement, $67.9 billion, in economic profits, which increased from $36.7 billion in 1Q22 to $104.6 billion in 2Q22.

The technology sector generates the most economic revenues of all sectors, but economic revenues declined 5% qoq in 2Q22. On the other hand, the utilities sector has the lowest economic income and was one of eight sectors to see a decline in economic income in 2Q22.

Below I highlight the industrial sector, where economic profits improved by $2.4 billion qoq in 2Q22.

Example sector analysis: industry

Figure 1 shows economic earnings for the industrial sector, at $49.3 billion, up 5% quarter on quarter in 2Q22, while GAAP earnings, at $163.1 billion, were flat over the same time.

Figure 1: Industrials Economic Profit vs. GAAP: 4Q98 – 2Q22

My economic profit analysis is based on aggregated TTM data for the sector components in each measurement period.

The period of August 12, 2022 includes the financial data of calendar 2Q22 10-Q, as this is the earliest date for which all calendar 2Q22 10-Qs for the NC 2000 parts were available.

Disclosure: David Trainer, Kyle Guske II, Matt Shuler, and Brian Pellegrini are not remunerated to write about a specific stock, style, or theme.

Appendix: Calculation method

I derive the economic income and GAAP income statistics above by summing the individual NC 2000 file values ​​for the last twelve months for economic income and GAAP income in each industry for each measurement period. I call this approach the “Aggregate” methodology.

The Aggregate methodology provides a clear view of the entire industry, regardless of market cap or index weighting, and is consistent with how S&P Global (SPGI) calculates metrics for the S&P 500.


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