The return on invested capital (ROIC) for the NC 2000 index witnessed a quarter-over-quarter (QoQ) decline in Q2 2023, continuing the downward trend that began after a peak in Q2 2022. This persistent dip suggests a slowdown in the corporate sector of the economy. Additionally, subdued earnings forecasts for the second half of 2023 hint that ROIC may not significantly rebound from its current levels in the near future.
Despite the general decline in the NC 2000's ROIC, seven out of its eleven sectors saw a QoQ increase in ROIC for Q2 2023. However, these gains were modest compared to sectors where ROIC dropped. The overall fall in the NC 2000’s ROIC is largely due to a decrease in net operating profit after tax (NOPAT) margins, while invested capital turns remained stable.
The NC 2000’s weighted average cost of capital (WACC) decreased QoQ for the first time after eight consecutive quarters of increases, which could potentially undermine investor confidence in many weaker companies.
Sector performance within the NC 2000 showed mixed results. Some sectors experienced an increase in ROIC, while others saw a decrease. This inconsistency at the company level might lead to the elimination of many weaker firms throughout the rest of 2023.
In terms of sector performance, the Financials sector emerged as the top performer in Q2 2023, as measured by change in ROIC, with an increase of 19 basis points from Q1 2023. Conversely, the Energy sector suffered the largest loss with its ROIC falling by 212 basis points from Q1 2023.
The Real Estate sector saw no change in its QoQ ROIC in Q2 2023, with its ROIC remaining steady at 4.0% from Q1 2023. The NOPAT margin for the Real Estate sector remained unchanged at 18.4% from Q1 2023, while invested capital turns also remained stable at 0.2 over the same period.
The analysis of the NC 2000 is conducted using SPGI’s methodology, which aggregates individual NC 2000 constituent values for NOPAT and invested capital. This report is based on the latest audited financial data available, which is the 2Q23 10-Q in most cases, with price data as of August 15, 2023.
The evaluation of ROIC employs various weighting methodologies. The "Aggregate" methodology sums up individual NC 2000/sector constituent values for revenue, NOPAT, and invested capital to calculate metrics. Market-weighted metrics and market-weighted drivers are other methods used, each with their own pros and cons. While the Aggregate approach offers a straightforward view of the entire sector, it can be sensitive to changes in companies entering or exiting the group. The market-weighted metrics and drivers methods consider a company's size relative to the overall NC 2000/sector and adjust its metrics accordingly but may minimize the impact of smaller companies or be susceptible to an outsized impact from one or a few companies.
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