We calculated ROI and growth in invested capital for approximately 1,000 of the largest firms in Corporate America over the last several decades. We then computed the aggregate embedded expectations of ROI and growth that are necessary to deliver the valuations we see in U.S. equities today. Finally, we examine this in context of a proprietary Business Growth Confidence Index that measures trends in management guidance over 6,000 earnings calls over several years.
The results are consistent with an early stage of a bull market. U.S. corporates have been generating very high ROIs, however reinvesting in their businesses at low growth rates relative to history. Fortunately, to justify current market valuations, we only need forecasts for ROI and growth to continue at these levels. For significant market upside, we’d need to see more business growth, which overall, U.S. management teams are just not planning. Our proprietary index tracks management confidence in new growth opportunities. This index today is at multi-year lows.
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