Are We Sure?

Here’s a snapshot of S&P 500 index company sales, dividends, earnings, and stock price performance, all expressed on a per share basis, for the 10 years ending 9/30/2025, courtesy of Mauldin Economics1:

Margin expansion has been impressive (earnings per share growth almost 2x sales per share growth); but stock price performance has been even more impressive (with price up more than 3x sales) over the last decade.

Some way wonder if the extra price performance relates to the index being cheaply valued a decade ago. But that’s not the case: according to professor Robert Shiller at Yale2, the price/earnings (P/E) ratio for the index (using average 10-year trailing earnings) was under 25x on 9/30/2015 (today it is almost 39x). This compares to an average ratio since 1980 of less than 24x.  It’s safe to say that the extra price performance is the result of investor willingness to pay a much higher price (well above the long run average) for a dollar of earnings.

Can we assume similar results for the next 10 years?

Our contention is that the answer is no – that we will look back on the period of the 2010s to the mid-2020s as something of an aberration; a time when the tailwind of lower labor costs, low materials and input costs, lower tax rates, and low interest rates combined to deliver a ‘cupcakes and rainbows’ scenario for U.S. corporations that enabled margin expansion and a cocktail of follow-on effects (like financial engineering, stock buybacks, massive transfer of value to management via stock options).

In fact, the factors cited above have already begun to change in recent years. According to investment manager GMO, the fundamental performance (sales & earnings growth) of the ‘magnificent 6’ (Alphabet; Amazon; Apple; Meta; Microsoft; Nvidia) has indeed been magnificent over the last five years. But the rest of the S&P 500 companies? Not so much – over the last five years fundamental performance has materially lagged the historical long run average.3

And what of the Magnificent 6? It’s worth noting that the many of their incredibly successful products over the last 15-20 years did not require them to build the infrastructure upon which those products depend (i.e., global internet connectivity was built and paid for by other investors and companies). But now they DO need to pay for high performance compute infrastructure in service to various flavors of artificial intelligence, as the chart below shows.4

These stocks are priced as if their remarkable return on invested capital history will continue uninterrupted. Are we sure? 

Capital deployed is increasing at a rapid rate. Investors will want to see a return on that capital. Can we assume that earnings growth will continue to outpace sales growth the way it has for the last decade?

Can we assume that investors will continue to pay higher and higher prices for a dollar of S&P 500 index company earnings?

There are 494 companies in that index that are already feeling the effects of higher labor costs, higher cost for materials, higher interest rates. Maybe the other 6 companies are impervious to those factors.  Maybe…

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1. https://images.mauldineconomics.com/uploads/pdf/CTM_Oct_08_2025.pdf (see p.5)

2. http://www.econ.yale.edu/~shiller/data.htm - note that the mean P/E on a trailing 10-year average earnings basis since 1900 is 17.6x but we cite the mean since 1980 to address arguments that the composition of the U.S. economy has changed significantly in the  last 40 years resulting in more higher margin businesses that should rightfully be accorded higher valuations.

3. https://www.gmo.com/americas/research-library/american-unexceptionalism_gmoquarterlyletter/

4. https://www.mauldineconomics.com/frontlinethoughts/knowns-and-unknowns

The views expressed represent the opinions of Bluestone Financial Advisors as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed.

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Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website.www.adviserinfo.sec.gov   Past performance is not a guarantee of future results.