August 28, 2014

The S&P 500 Not Overvalued, Still Undervalued Given ROA Strength Of USA Corporates


  • Aggregate US Corporate Profitability, as measured by Adjusted Return On Assets (ROA) Is Highest in 60+ Years.
  • US Corporate ROA’s hit new highs in 2012 and 2013, now exceeding those levels in 2014.
  • Underlying corporate management activities and discipline, including low corporate investment growth, supports continued – not a short-lived – ROA peak.
  • The notion of “reversion to the mean” from peak levels is important if viewed in context. There is danger in calling for a reversion before it begins.
  • A higher corporate ROA supports higher market valuations, making the market specifically NOT overvalued and more likely still undervalued.

Every month, we update our best estimate of aggregate U.S. corporate profitability. We calculate the Adjusted Return On Assets (ROA) of 4,000+ of the largest companies in the United States. Today, our estimated ROA for 2014 stands at an amazing 11%. This is a record-setting high, and above 2013’s 10% ROA. It’s a testament to the discipline of US Corporate Management in the face of tough economic times. It’s also the reason why market valuations for major indexes like the S&P500 (NYSEARCA:SPY), are actually justified at current levels, if not slightly under-valued.

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