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Looking at sales per share alone isn't very useful when comparing two separate companies, and is even misleading. But it is pretty good when comparing a single company with itself over different periods, and it is extremely good when viewing as single index over different periods.

The sales multiple of any index rises and falls over time, and margins also expand and contract, so to track the increase in value of the indexes it far better to track the rate of change of sales. It is very simple, and about as good as more sophisticated portrayals of intrinsic value growth.

It is certainly more informative than looking at the change in EPS, subject to margins expanding and compressing over time, and exceedingly better than just looking at the change in quote.

            10-year         10-year 
            Sales growth    Margins
            =======         ======= 
S&P500      67%              25%  (10.7% to 13.4%)
Mid-caps*   84%              25%  (6.5% to 8.1%)

* For Mid-caps, I used the S&P400, however the result is similar to the small caps (S&P600) and the RSP (equal-weight). The S&P500 has its own very specific behavior, whilst RSP, S&P400 and S&P600 are so correlated (both in valuation multiples, sales per share and margins) that frankly it isn't important which of the 3 you select.

I showed the change in margins to clarify that the increased margins is not exclusive to the S&P500 as commonly thought.

What explains the S&P500 outperformance is not the margin expansion, nor the superior sales growth (in fact, the sales of the S&P500 the last 10 years were inferior to small caps, mid caps and equal weight).

The superior quotation change of the S&P500 is owing merely to the higher sales per share expansion.

With the price/sales ratio of the S&P500 is now at a historical high, it almost certain than further expansion over the next 10 years is out of the question.

S&P500 price/sales ratio:
Current  Last high      Recent low      20-year low    20-year avg
3.1x     3.0x (Dec 21)  2.1x (Sept 22)  0.8x (Mar 09)  1.8x

Betting on the S&P500 to continue reasonably strong returns and also outperform the Mid-cap indexes over the next decade is a bet on (1) the sales/per share multiple rising from its current 3.1x to ever higher historical levels, and (2) for this multiple expansion rate to be higher than the multiple expansion rate of the mid-caps (which are starting at a much lower level), and (3) for the multiple expansion rate to be not only higher, but higher by the amount that the Mid-caps outperform the S&P500 by sales/per share as they have done the last 10 years and over longer periods.

Even if we pass 1, then we have to also pass 2. Even if we pass 2 then we have to also pass 3. Only then do we have the S&P500 outperform mid-caps for the next decade. I think this is possible, if you like to betting on small speculative probabilities, but very unlikely.

If the price/sales ratio the S&P500 doesn't fall from its historical high, and is sustained at the current 3.1x level for the next decade, and the RSP continues to outperform the S&P500 in sales at its historically average (and recent) level of 2%, then RSP will be the better investment.

- Manlobbi

Are you referring to net margins?

Are you referring to net margins?

The margins were calculated as:

(Forward operating earnings per share) / (Forward revenues per share)

The data source for the margins is https://refini.tv/3OtmPdT

It is worth observing this next chart that shows that large caps do not look overvalued at all when factoring in the expected 5-year forward earning growth, compared to the PE ratio today:

https://product.datastream.com/dscharting/gateway....

The chart above looks at the PEG ratio calculated the same way now as through the past (calculating both forward PE and 5-year forward growth in the same way). The present PEG (PE divided by growth) ratio is not high at all, and about equal to the average level of the last 30 years (1.2 today, versus average 1.3, lowest at 0.9 in 2009).

But note that having a PEG around this average level of 1.3 didn't predict much in the past. In early 2000, when stocks were definitely really overvalued, the PEG ratio was at 1.4, which is similar to the average level of the last 30 years, and also close to today's level of 1.3. Yet the 10-year S&P500 returns was terrible from early 2000, not because earnings were temporary inflated (the PE ratio was very high, revelaing the low earnings) but because the 5-year earnings projections were so enormous in early 2000.

Are we falling for the same mistake today, with the earnings projections overheated?

Large cap margins are presently at historical highs. And we do know that earnings projections are often optimistic when current earnings are also high, and projections pessimistic when current earnings are depressed. This points to earnings projections being overly optimistic today also.

Two opposing views might be that either: (A) The margins of the S&P500 as a whole, will mean-revert downwards closer to their historical level, or (B) that the political and economic climate will remain similarly over the next 20-years or so, with the present mega-cap firms continuing to retain their extremely high margins.

There is another view, which I view as the more likely than B: This is that (C) winner-takes-all corporation characteristic of our modern society, owing to the political/technological structure, will be retained over multiple decades, but there will be a significant (but changing, so differnet each decade) part of the S&P500 that will retain higher margins than what what was historically normal. This might not be the same firms as today (Facebook, Amazon, etc) but there will still be some part of the S&P500 with these high margins over 10 or 20 years. (For example, a new social media firm may come into vogue, and other out of vogue, but the winner-takes-all characteristic of today's political/technological climate does suits a significant number of firms extracting excessive profits on a pretty continual basis.)

If that is right, then the S&P500's 5-year PEG, being near its historical average, could still be relatively legitimate (unlike in early 2000 when the earnings growth expectations were far too high), even as some of the present big names struggle occasionally and other big names enter the scenes. For example, Nvidia recently entered mega-cap territory from almost no-where, which might be less dominant in 20 years but another taking its place, and S&P500 margins over complete cycles still higher than historically.

I'm just thinking aloud and do not have a strong opinion about this, and just dividing out the possibilities with reasoning. Part of my mind expects margins to mean revert downwards, but another part of my mind understands that higher margins should be a consequence of stronger winner-takes-all characteristics of today's society than in the past. We had news media in the past, and correspondingly we had anti-monopoly laws for news media, but the efficiency of advertising in print media was so primitive compared to today that it was no-where near the large enterprise as it is today (with other firms such as resources and huge industrials still being dominant over most of the 20th C, which lack the same economic moats as modern advertisers, and software setups with massive switching costs).

In balance, my central expectation would be for large cap (S&P500) margins to be lower in ten years than that are exactly today, but still higher than that the last century. With bit more work, that leads to the S&P500 likely being overpriced today, but compared to bonds, closer to okay value than what you get by looking at the price/sales and CAPE ratio alone. Small caps and medium cap stocks, with their PE today (even without the high growth expectation) at 25-year average levels, are better value again.

- Manlobbi

Thank you for answering my question.

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