2Q24 ROIC Update For The S&P 500 & Sectors

I have updated the trailing-twelve-month (TTM) return on invested capital (ROIC) for the S&P 500 and all sectors for 2Q24. No matter the trend for the index, beneath the surface, performance by sector varies quite a lot. Some sectors saw ROIC rise while others saw it fall. The deeper I dig, the bigger the differences. For example, NOPAT margins and invested capital turns (the key drivers or ROIC), I see wildly different results in different sectors.

Six out of eleven S&P 500 sectors saw a QoQ rise in ROIC in 2Q24.

This metrics are calculated using SPGI’s methodology, which sums individual S&P 500 constituent values for NOPAT and invested capital. See Appendix III for more details on this “Aggregate” method and Appendix I for details on how I calculate WACC for the S&P 500 and each of its sectors. This report is based on the latest audited financial data available, which is the 2Q24 10-Q in most cases. Price data is as of 8/15/24.

This report leverages my firm’s cutting-edge Robo-Analyst technology to deliver proven-superior fundamental research and support more cost-effective fulfillment of the fiduciary duty of care.

S&P 500 ROIC Analysis for 2Q24

Key observations:

The S&P 500’s NOPAT margin remains well above the historical average of since 2004. See Figure 17 in the full report for details. Balance sheet efficiency may have stalled, as invested capital turns have remained at the same level for each of the past four quarters. I have to look back to early 2013 to find a time when invested capital turns were higher. In other words, to drive ROIC higher, companies must drive invested capital turns up past record levels and/or drive NOPAT margins back near the post-COVID record levels.

WACC for the S&P 500 rose QoQ again in 2Q24, the eleventh QoQ increase in the past twelve quarters. With expectations for rate cuts in the coming months, WACC could see some easing, but I except it to remain high for the foreseeable future. The high cost of capital undermines the ability of many weaker companies to fund poor business models with cheap capital.

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Sneak Peak on Select S&P 500 Sectors

The Technology sector performed best in the second quarter of 2024 as measured by change in ROIC. The biggest loser in the first quarter was the Industrials sector.

To give you a sense of what I show in the full report, I provide a snippet on the Technology sector, below.

The full report provides these details and charts on the S&P 500 and all sectors.

Sample Sector Analysis: Technology

Figure 1 shows the Technology sector’s ROIC rose from 23.8% in 1Q24 to 24.2% in 2Q24. The Technology sector’s NOPAT margin rose from 24.1% in 1Q24 to 24.7% in 2Q24, while invested capital turns fell from 0.99 in 1Q24 to 0.98 in 2Q24.

Figure 1: Technology ROIC vs. WACC: December 2004 – 8/15/24

The August 15, 2024 measurement period uses price data as of that date for the WACC calculation and incorporates the financial data from 2Q24 10-Qs for ROIC, as this is the earliest date for which all the 2Q24 10-Qs for the S&P 500 constituents were available.

Figure 2 compares the trends for NOPAT margin and invested capital turns for the Technology sector since 2004. I sum the individual Technology sector constituent values for revenue, NOPAT, and invested capital to calculate these metrics. I call this approach the “Aggregate” methodology.

Figure 2: Technology NOPAT Margin and IC Turns: December 2004 – 8/15/24

The August 15, 2024 measurement period uses price data as of that date for the WACC calculation and incorporates the financial data from 2Q24 10-Qs for ROIC, as this is the earliest date for which all the 2Q24 10-Qs for the S&P 500 constituents were available.

The Aggregate methodology provides a straightforward look at the entire sector, regardless of market cap or index weighting. The methodology matches how S&P Global (SPGI) calculates metrics for the S&P 500.

For additional perspective, I compare the Aggregate method for ROIC with two market-weighted methodologies: market-weighted metrics and market-weighted drivers. Each method has its pros and cons, which are detailed in the Appendix.

Figure 3 compares these three methods for calculating the Technology sector ROIC.

Figure 3: Technology ROIC Methodologies Compared: December 2004 – 8/15/24

The August 15, 2024 measurement period uses price data as of that date for the WACC calculation and incorporates the financial data from 2Q24 10-Qs for ROIC, as this is the earliest date for which all the 2Q24 10-Qs for the S&P 500 constituents were available.

Disclosure: David Trainer, Kyle Guske II, and Hakan Salt receive no compensation to write about any specific stock, style, or theme.

Appendix: Analyzing ROIC with Different Weighting Methodologies

I derive the metrics above by summing the individual S&P 500 constituent values for revenue, NOPAT, and invested capital to calculate the metrics presented. I call this approach the “Aggregate” methodology.

The Aggregate methodology provides a straightforward look at the entire sector, regardless of market cap or index weighting and matches how S&P Global (SPGI) calculates metrics for the S&P 500.

For additional perspective, I compare the Aggregate method for ROIC with two other market-weighted methodologies:

Market-weighted metrics – calculated by market-cap-weighting the ROIC for the individual companies relative to their sector or the overall S&P 500 in each period. Details:

1. Company weight equals the company’s market cap divided by the market cap of the S&P 500/its sector
2. I multiply each company’s ROIC by its weight
3. S&P 500/Sector ROIC equals the sum of the weighted ROICs for all the companies in the S&P 500/each sector

Market-weighted drivers – calculated by market-cap-weighting the NOPAT and invested capital for the individual companies in each sector in each period. Details:

1. Company weight equals the company’s market cap divided by the market cap of the S&P 500/its sector
2. I multiply each company’s NOPAT and invested capital by its weight
3. I sum the weighted NOPAT and invested capital for each company in the S&P 500/each sector to determine each sector’s weighted NOPAT and weighted invested capital
4. S&P 500/Sector ROIC equals weighted sector NOPAT divided by weighted sector invested capital

Each methodology has its pros and cons, as outlined below:

Aggregate method

Pros:

• A straightforward look at the entire S&P 500/sector, regardless of company size or weighting.
• Matches how S&P Global calculates metrics for the S&P 500.

Cons:

• Vulnerable to impact of by companies entering/exiting the group of companies, which could unduly affect aggregate values despite the level of change from companies that remain in the group.

Market-weighted metrics method

Pros:

• Accounts for a firm’s size relative to the overall S&P 500/sector and weights its metrics accordingly.

Cons:

• Vulnerable to outsized impact of one or a few companies, as shown in the full report. This outsized impact tends to occur only for ratios where unusually small denominator values can create extremely high or low results.

Market-weighted drivers method

Pros:

• Accounts for a firm’s size relative to the overall S&P 500/sector and weights its NOPAT and invested capital accordingly.
• Mitigates potential outsized impact of one or a few companies by aggregating values that drive the ratio before calculating the ratio.

Cons:

• Can minimize the impact of period-over-period changes in smaller companies, as their impact on the overall sector NOPAT and invested capital is smaller.