US Weekly Kickstart
Elevated borrow costs weighed on S&P 500 profitability in 1H as impact of higher yields began to take hold
S&P 500 return on equity (ROE) (ex-Financials) has fallen by 69 bp this year to 23.4% but still ranks at the 97th percentile since 1975. Increased interest expense was the primary headwind to aggregate ROE and was also a headwind across every sector this year despite historically being a tailwind for profitability. We expect S&P 500 ex-Financials ROE will stabilize in 2024 as decelerating input cost growth and price inflation support EBIT margins. The key risk for profitability in the new ‘higher for longer’ rate environment will be higher interest expenses and lower leverage. We highlight a screen of stocks which are less vulnerable to rising rates and rebalance our ROE growth basket (GSTHGROE) in this report (Exhibit 6).
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