January 2025 Update
A billion here, a billion there, sooner or later it adds up to real money.
everett Dirksen
Since the release of D/S and DEM in July 2024, several companies have been added to and removed from the S&P 500 index. Additions include Palantir Technologies (PLTR), Dell Technologies (DELL), Erie Indemnity (ERIE), Texas Pacific Land Corporation (TPL), Apollo Global Management (APO), and Workday, Inc. (WDAY). Companies removed include American Airlines Group (AAL), Etsy (ETSY), Bio-Rad Laboratories (BIO), Marathon Oil (MRO), Qorvo (QRVO), and Amentum Holdings (AMTM).
The U.S. economy has shown resilience, characterized by steady growth and a strong labor market. Real GDP increased at an annual rate of 3.1% in the third quarter of 2024, slightly improving from the 3.0% growth in the second quarter. This growth has been largely fueled by consumer spending, which expanded at a 3.5% annual rate– its fastest pace since late 2023. Confidence in the economy has remained relatively high, as households continue to drive economic momentum through increased discretionary expenditures. Global events have also significantly influenced the U.S. economy during this period. Trade policy discussions under President Elect Trump, particularly around potential import taxes, raised concerns about international trade tensions. Geopolitical issues, including the ongoing war between Israel and Palestine, have added to investor caution and impacted global markets indirectly. Rising interest rates, coupled with the Federal Reserve’s stance on inflation, have further reshaped borrowing costs and affected corporate and household decisions.
When looking at debt specifically, D/S and DEM are valuable tools. The industrial sector experienced a notable rebound recently, with production increasing by 0.6% in December, possibly supported by the resolution of a workers’ strike at Boeing and strength in aerospace output. Financial services saw a particular finish, with major investment banks like JPMorgan Chase achieving record profits. Meanwhile, rising oil and natural gas prices propelled the energy sector to a 5.4% gain, while healthcare posted a 2.8% rise as investors sought defensive assets amid market uncertainties. Let us now explore the quantitative side.
| Sector | Debt per Share | Debt to Earnings |
| S&P 500 | 220.09 | 9.15 |
| Real Estate | 50.37 | 23.31 |
| Utilities | 58.17 | 16.41 |
| Healthcare | 41.02 | 11.08 |
| Financials | 1289.54 | 10.09 |
| Communication Services | 53.93 | 9.51 |
| Consumer Staples | 26.69 | 8.52 |
| Materials | 33.22 | 8.2 |
| Consumer Discretionary | 73.78 | 7.88 |
| Energy | 25.38 | 5.95 |
| Industrials | 42.58 | 4.65 |
| Information Technology | 18.05 | 4.62 |
For the S&P500, D/S rose from 217.33 to 220.09, reflecting a marginal rise in average debt levels across companies. DEM also experienced a slight increase, moving from 8.99 to 9.15, suggesting that earnings growth may not have kept pace with rising debt in certain sectors.
Healthcare jumped from the seventh highest DEM to the third highest. A Moody’s report published at the dawn of 2024 successfully predicted problems for the healthcare sector, suggesting that many companies would have no other options but to default. “Reasons include excessive leverage, elevated interest rates and expiring interest rate hedges.” Real estate and utilities remained at the top of the list for DEM. Real estate saw a significant rise in DEM from 20.96 to 23.31, maintaining its position as the highest among all sectors. This continued dominance reflects the capital-intensive nature of the industry, but it also reflects trends in the housing market. In December 2024, the median price of a home in the US was $427,670, a 6.3% increase YoY. In December 2024, the national average 30-year fixed mortgage rate was 6.7%, which is a 0.1 point decrease from the previous year. Continuously high mortgage rates will not be helpful in improving the companies’ leverage positions. Utilities, however, experienced a notable decrease from 18.44 to 16.41, showing some stabilization within the sector. The 11.01% drop could possibly be attributed to the growing adoption of artificial intelligence and the expansion of data centers, which increases earnings. A similar argument can be made for the industrial sector, which experienced a DEM drop of 27 percentage points. The industry has strived post-pandemic, and companies are often resilient to fluctuations in interest rates.
Big names in the S&P500 have held strong. Apple, Nvidia, Microsoft, Meta, and Alphabet– some of the biggest holdings within the index– all remain in the bottom 100 in terms of DEM. Tech company stock has notably outperformed in the past year. My research reflects the fact they have an important ability to generate earnings while keeping debt levels low, making them a safe long-term bet for investors. There are many other individual conglomerates worth exploring. Gilead Sciences, a biopharma company in the healthcare sector, had the 10th highest DEM among the S&P500 at 51.85 in July 2024. Since then, the company has seen a 259.72% increase in DEM, making its Debt to Earnings of 186.55 the highest in the S&P. This is likely due to the fact that earnings per share dropped from 0.39 to 0.1, all while the company increased its debt. I discussed Gilead in my initial white paper, quoting, “This [DEM] should be an immediate red flag to investors who are looking to enter into a pharmaceutical.” Although the stock price has seen about a 25% increase over the past six months, how long can the company sustain its current leverage position?
Debt to earnings is useful in pointing out red-flags for investors. But, it is also important in reflecting a company’s ability to manage its financial obligations and sustain long-term growth. Costco, for example, has the second lowest DEM for consumer staples. The stock (COST) has surged in recent years and has served as a successful play for value investors. Next, we can look at a company like MarketAxess Holdings Inc (MKTX). The stock is down in the past six months and possibly continuing its trend. Yahoo Finance reports that the company is experiencing “short-term challenges such as declining market share, falling transaction fees, rising expenses.” However, “trading volumes” and a “strong financial position” show upside for the company. Is this the case? According to my numbers, the company’s DEM has held steady in the past six months, sitting around 0.27. This is the third lowest DEM for the entire financial sector. What’s more, earnings per share has increased by about half a dollar. Although this is not investment advice, exploring debt per share and debt to earnings might provide valuable long-term insight for a company.
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