Torsten Slok of Deutsche Bank charts the return on equity for US corporates, which has fallen to a new low:
On the one hand, perhaps the trend shouldn’t be too surprising given the continued rally in equities, which of course has coincided with sluggish overall economic growth.
On the other hand, you’d think that the impressive rise in corporate debt issuance and relative paucity of initial public offerings in the past half-decade would have offset some of the trend. (Higher leverage should push up ROE, all else equal.) This is especially the case given how much of the borrowings from that debt has been used to fund buybacks.
So we’re not entirely clear what to think about this, but it’s one more indicator to worry people who are already nervous about the sustainability of equities at current valuations — and of the current economic expansion generally.
UPDATE: A few readers asked for the source data in addition to whether the chart values equity at market vs book value. We had assumed it was market value, which Slok confirms to us via email:
It is market equity, there is no good economy-wide measure of book value. And for real-life business decisions it is market value that matters: What is relevant for the buying power of a company to do acquisitions and investments in capex is the market value of their stock not the book value.
Th source is the Fed Flow of Funds data.
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