There have been many discussions of the high levels of stock evaluations. In a recent report Goldman Sachs notes that the S&P 500’s return on equity is also at a record high of 22%, largely fueled by mega-cap technology stocks and surging semiconductor profitability. Goldman Sachs looks at the implications on the market and sectors.
Differences in profitability are correlated with valuations.
They write “Whether S&P 500 valuations revert toward their long-term average or prove structurally higher going forward will depend in large part on the trajectory of corporate profitability. Based on our macro model, every 1 percentage point change in S&P 500 ROE is associated with a change of roughly 1x in S&P 500 P/E.”
That makes a lot of sense, a more profitable business is worth more than a less profitable business. The chart also points out that NASDAQ is the place to be by a big margin.
I think the best value (return to mean) is presented for indices where they fall BELOW the line (and the further to the right, the better)…Stoxx 600, S&P600, S&P500…
There seems to be a conflict between value investors and growth investors. Value investors (and commodity investors) believe prices will trend to the norm. Growth investors believe well managed companies can continue to grow earnings. AI has lots of growth potential if it performs as promised. We shall see how it works out. Yes there will be some excesses.
I agree entirely. What I have found is that growth investors can generate lots of income via covered calls while the underlying stock does its crazy volatility dance. It takes some nerve.
New Commerce Department data released Thursday showed that total corporate profits in the first quarter of 2026 totaled $4.42 trillion on an annualized basis, a jump from $4.35 trillion in the fourth quarter of 2025…
Corporate profits, on an after-tax basis, represent 12.4% of US gross domestic product, the highest reading since the second quarter of 2021…
