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AI Summary. Banks provide a smaller share of corporate credit than before the financial crisis, with bank lending falling from about 27% of total non-financial corporate debt to about 20%.
Torsten Sløk ApolloCore argument: Bank lending has fallen from roughly 27% of total non-financial corporate debt before the financial crisis to about 20% today, according to Torsten Sløk.
[Torsten Slok] will be giving a presentation on “The Growing Role of Private Credit” today at the Hoover Institution during a conference celebrating John Taylor and the Taylor role.AI Summary. Stocks rose broadly after a sweeping Democratic win in midterm elections, with health insurers tied to the Affordable Care Act and solar companies gaining while data-center firms and companies linked to Trump and Musk fell. The move reflects the increment beyond already-priced-in Democratic victories, from greater certainty and a larger-than-expected margin.
Jason Furman EconvitalsCore argument: The broader stock market rallied the day after Democrats won a sweeping victory in the midterm elections, and the composition of winners and losers indicates what the market expects the policy impact to be.
The broader stock market rallied the day after Democrats won a sweeping victory in the midterm elections. Perhaps more interesting, and more telling, was the composition, which shows what the market thinks the policy impact of the election will be: health companies (especially ones like Centene, with close ties to the Affordable Care Act) and solar companies were up, while data-center companies and Trump- and Musk-related companies were down. And remember, Democratic victories were already priced in, so this is just the additional increment from greater certainty as well as the larger-than-expected magnitude.AI Summary. Holding US corporate free cash flow at its record 15% share of gross value added and keeping valuation multiples fixed implies a real expected return of about 5.3%, below what US corporate capital has historically delivered. Earning the historical average would require that cash flow share to keep rising, a bet on capital gaining at labor's expense.
Hanno Lustig The Two CentsCore argument: Holding the multiple fixed, a 3.26% free cash flow yield plus the Survey of Professional Forecasters’ 4.58% projected nominal GDP growth and 2.5% inflation implies a real expected return of roughly 5.3% on US corporate debt plus equity.
At a CAPE of 40.7 US stocks look extremely expensive, and expected returns are low, especially compared to TIPS yields. Plugging in today’s numbers, you back out an expected real return of around 3% over the next decade, compared to a 10-year TIPS yield of 2.6%. Now, instead of an investor holding a single share, we could look at an investor who owns the entire corporate sector, all equity, bonds, and other liabilities. This investor acquired a claim to FCF, the total amount of cash that can be paid out to its owners, including bondholders: gross corporate value added left after paying workers, the government, and investment expenditure. This FCF is now about 15% of corporate value added. Earnings minus FCF is net investment; corporations have invested less. Its FCF yield is 3.26%, vs. 3.21% since 1952. That delivers an approximate real expected return of 5.3%, below what US corporate capital has historically delivered.AI Summary. The cyclically adjusted price-earnings ratio for the S&P 500 stands at 40.7, implying an earnings yield of 2.46% and, combined with an estimated 1.8% annual real per-share earnings growth, a real expected return near 3% a year. Against a 2.75% inflation-protected 10-year Treasury yield, that leaves an equity premium of roughly 25 basis points, assuming the elevated multiple holds.
Hanno Lustig The Two CentsCore argument: The S&P 500’s cyclically adjusted price-earnings ratio stands at 40.7, close to an all-time high, implying an earnings yield of just 2.46% for buyers of the index.
The CAPE is currently trading at 40.7, which is close to an all-time high. You’re paying close to 41 times annual earnings when you buy the S&P 500. The implied earnings yield is only 2.46%. According to AQR, a reasonable estimate for real earnings growth (on a per share basis) is 1.8% per annum. If you plug in today’s numbers, you end up with a real expected return of around 3% per year for U.S. equity. That’s a surprisingly low number. When you compare it to the 10-year TIPS yield of 2.75%, you’re left with a razor-thin equity premium. The stock market will only yield an extra 25 basis points per annum over the next, say, 10 years to compensate you for taking on equity risk. You might think this is a very conservative estimate, but it’s actually not, because we’re implicitly assuming that the CAPE stays at 40.7 over the next 10 years. That’s quite a lofty multiple. Even casual eyeball econometrics suggests that that’s not a great assumption, because the price-earnings ratio tends to revert back to its mean.AI Summary. Payment-data analysis finds 80% of the largest corporate AI spenders are venture-backed, versus 13% of the median spender, indicating that much token spending is funded by venture capital rather than earnings. If AI payoffs are slow, venture returns could suffer and a funding pullback could weaken demand for computing power.
Torsten Slok ApolloCore argument: Ramp data show 80% of the top 1% of AI spenders are venture-backed, versus 13% of the median spender, suggesting the largest buyers of compute are funding token spending with venture capital rather than organic earnings.
Ramp data show that 80% of the top 1% of AI spenders are VC-backed, compared with only 13% of the median spender, suggesting that the circularity seen among AI hyperscalers and model providers also extends to token spending, as the startups buying the most compute are paying for it with venture capital rather than organic earnings. If the AI payoff is slow to materialize or never arrives, VC returns would come under pressure, since the capital funding today’s token spending would have little to show for it, and a pullback in venture funding could in turn weaken demand for compute.AI Summary. Publicly listed firms' profit margins were roughly flat through the 2010s, with gross margins growing about 0.4% a year from 2010 to 2019, then turned up: average gross margins rose from about 34% of sales in 2019 to 37% in 2025, and operating margins from 16% to 18%.
Jeremy Pearce Federal Reserve Bank of New YorkCore argument: Average operating margins rose from about 16% of sales in 2019 to 18% in 2025, growth of 2.4% a year, after being roughly flat through the 2010s.
A profit margin is profit divided by sales: the share of each sales dollar the firm keeps after paying its costs. The gross margin subtracts the direct cost of production (cost of goods sold), while the operating margin also subtracts overhead (selling, general, and administrative expense, which in Compustat typically includes R&D). If productivity gains were flowing to firms’ profits, margins should show it. Through the 2010s margins were flat: gross margins grew about 0.4% a year from 2010 to 2019, and operating margins were roughly flat. Both then turned up: on average, gross margins went from about 34% of sales in 2019 to 37% in 2025 (1.3% growth per year), and operating margins from 16% to 18% (2.4% growth per year). Part of the gains surfaced with wider profit margins: on a reasonable baseline, the operating margin rose over 2% a year from 2019 to 2025.AI Summary. Corporate profit margins, long regarded as one of the economy's most reliably mean-reverting series, have risen continuously so far this century. Measured through the national income accounts used in calculating GDP, profits now take a larger share of the economy than on the eve of the 1929 crash.
John Authers BloombergCore argument: Corporate profits measured in the National Income and Product Accounts take a larger share of the U.S. economy than on the eve of the 1929 Great Crash.
Throughout the 20th century, profit margins were regarded as one of the purest mean-reverting series in the economy. So far this century, however, margins have done nothing but rise. Measured with the National Income and Product Accounts, part of the GDP calculation, profits are currently taking a bigger share of the economy even than on the eve of the Great Crash in 1929. The series comes with a lag, so we can assume the profit share on this basis is comfortably at a record by now.