According to a recent note from Goldman Sachs chief US equity strategist David J. Kostin, over the last few decades stocks have enjoyed strong return on equity (ROE), a common measurement of a company’s profitability and efficiency.
“Since 1975, falling interest expense and greater leverage have contributed 18.5 pp of the overall 8.8 pp increase in S&P 500 ROE, while lower taxes have contributed 8.9 pp, higher EBIT margins contributed 5.9 pp, and lower asset turnover contributed -24.5 pp during the same period,” Kostin wrote. “A recent Fed paper similarly found that lower interest expenses and corporate tax rates explain more than 40% of the real growth in corporate profits from 1989 to 2019.”
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