Charting the Market: Prioritizing Profits in the Next Phase of the Rally


Head of SPDR Americas Research

  • Profitability has mattered more lately than in prior phases of the market rally
  • Unprofitable firms have trailed profitable ones within broad US, growth, value, small caps, and sectors over the recent months
  • With this trend expected to continue into 2022 as sentiment wanes, investors may want to consider adding a quality overlay to portfolios

Profitability has mattered more lately than in prior phases of the market rally. This trend is also likely to continue into 2022, as the cycle matures, variants impede a full recovery, and policy decisions start to create more volatility – both macro and fundamental.

In this charting the market, I will showcase profitability trends and how a focus on quality stocks may help you to navigate the path ahead.

Profiting from No Profit?

As mentioned in our 2022 ETF Market Outlook, profitability was less of a concern during the first part of the pandemic rally. From May 2020 to May 2021, US stocks with negative earnings over the prior 12 months outperformed firms with positive earnings by 34%. Since May 2021, that performance trend has flipped. Unprofitable firms have trailed profitable ones by 7%.1

A more in-depth study reveals the same trends, but on a broader scale. The chart below shows the same analysis, but broken out by market cap, style, and region of focus. The trend was quite consistent throughout and shows that, at first, it didn’t matter if firms were profitable — until all of it sudden, it did.

Performance difference between non-profitable and profitable stocks

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1 Per Bloomberg Finance, L.P. data as of December 7, 2021. Based on a non-rebalanced equal weighted composite of stocks in the Russell 3000 Index that had trailing negative 12-month earnings-per-share compared to a non-rebalanced equal weighted composite of stocks in the Russell 3000 Index that had trailing positive 12-month earnings-per-share. Stocks with an initial public offering (IPO) during the time frame were not considered, as the security needed to have a full period return to be included.


The EBITDA margin is a measure of a company’s operating profit as a percentage of its revenue. The acronym EBITDA stands for earnings before interest, taxes, depreciation, and amortization. Knowing the EBITDA margin allows for a comparison of one company’s real performance to others in its industry.

Captures large, mid and small cap representation across 23 Developed Markets (DM) and 23 Emerging Markets (EM) countries excluding the US.

The MSCI Em (Emerging Markets) Index is a free-float weighted equity index that captures large and mid cap representation across Emerging Markets (EM) countries. The index covers approximately 85% of the free float- adjusted market capitalization in each country.

Return on Assets
Return on assets (ROA) is an indicator of how well a company utilizes its assets in terms of profitability.

Return on Capital
Return on capital, or return on invested capital, is a ratio used in finance, valuation and accounting, as a measure of the profitability and value-creating potential of companies relative to the amount of capital invested by shareholders and other debtholders.

Return on Equity
The return on equity is a measure of the profitability of a business in relation to the equity. Because shareholder’s equity can be calculated by taking all assets and subtracting all liabilities, ROE can also be thought of as a return on assets minus liabilities.

Russell 3000 Growth and Value Index
A market capitalization weighted index. All the stocks in the underlying parent index are allocated into value or growth. Stocks that do not have pure value or pure growth characteristics have their market caps distributed between the value & growth indices.

Russell 3000 Index
A market capitalization weighted index of US stocks.

S&P 500 Index
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Originally Posted on December 10, 2021 – Charting the Market: Prioritizing Profits in the Next Phase of the Rally


The views expressed in this material are the views of SPDR Americas Research Team and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

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The value style of investing that emphasizes undervalued companies with characteristics for improved valuations, which may never improve and may actually have lower returns than other styles of investing or the overall stock market.

The market values of growth stocks may be more volatile than other types of investments. The prices of growth stocks tend to reflect future expectations, and when those expectations change or are not met, share prices generally fall. The returns on “growth” securities may or may not move in tandem with the returns on other styles of investing or the overall stock market.

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