All 606 companies in the MSCI USA index have now reported Q4 2023 earnings.1 Total net income, or profit, for those companies was USD441.41 billion in that quarter. This marks a decline relative to the first three quarters of the year but leaves net income for 2023 at USD 1.79 trillion, 12.6% above the USD 1.59 trillion reported in 2022 although 3.6% below the peak seen in 2021.
Since nominal GDP growth is a function of real GDP growth and inflation, it is also informative to look at the correlation between MSCI USA net income and these variables. For quarter-on-quarter changes, the correlation is 15.4% with real GDP growth and 16.0% with Personal Consumption Expenditures (PCE) inflation. For year-on-year changes, the correlations are 50.8% and 16.1% respectively. Investors have focused on inflation and monetary policy in recent quarters, but the correlations suggest that the growth outlook is more important for equity markets in the long run.
It is also interesting to look at the contribution to the aggregate of the ten most profitable companies. The contribution is volatile from one quarter to the next and so it is helpful to look at the four-quarter moving average. It is important to note this reflects both the net income of the ten most profitable companies and that of the remaining companies. Thus, if the net income of the ten most profitable companies in the index is unchanged from one quarter to the next, but the other companies in the index experience a decline in profits, the contribution of the ten most profitable companies will increase. Nonetheless, it is notable that allowing for volatility, this contribution has been growing over time.
It is also possible to estimate the proportion of MSCI USA returns generated by the top ten contributing companies. In 2023, for example, the largest ten return contributions accounted for 61.1% of the total return of the MSCI USA index. It is interesting to note that these same ten companies accounted for 21.3% of net income of the MSCI USA index, such that the difference between return contribution and profit contribution was 39.8%.
While this may seem like a large difference, it should be noted that since 2010, the spread has been higher on three occasions. However, all three of these occasions also mark years in which the MSCI USA total return was relatively low and the proportion of the return from the top ten contributing companies was relatively high.
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