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Profitability is Inflecting

In the past couple of months, we've highlighted how Profitability (a component of Quality), has been Oversold relative to its long-term trend.

As a reminder, Profitability is a combination of return-on-equity, return-on-assets, cash flow to assets, cash flow to income, gross margin, and sales-to-assets.

Over time, the risk premia for Profitability has been strongly positive (see below), but the factor has seen weakness relative to long term trend over the past ~6 weeks in both our US and Global models. It now appears to be moving back towards the mean.

Long Term Trend


Global Model

After bottoming out at -1.83 SD below the mean on September 4th, Profitability has gradually started to revert to the mean. Today, it now sits at -1.28 SD below the mean, and it appears that the past few days have seen a bit of a quicker uptick.


US Model

We've seen a similar trend for Profitability in the US. Since hitting an August 7th peak of +1.03 standard deviations above the mean (Overbought territory), the factor experienced a divergence from the long term trend on a normalized basis, falling to a September 25 trough of -1.84 SD below the mean. As you can see below, the factor has ticked up over the past two days, now sitting at -1.59 SD below the mean.


In the US, the sectors that are most correlated to Profitability are Utilities, Consumer Staples, and REITs.


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