Trend to very high Return on Equity

In many of the stocks on my watch list I've noticed an increasing trend toward historically high returns on equity (ROE). ROE = net income / average balance sheet equity.

To the degree that increasing ROEs are not sustainable it made me wonder to what degree is the overall market seeing the same trend? The data below seems to indicate overall market returns on equity are at a fairly high level.



While the increasing ROE leads to increased profit growth, if it's already at a high level it makes me wonder if there's any more upside earning growth due to more efficient deployment of equity. The more reasonable expectation is that ROEs should return to more historical averages.

Below ROEs are shown for stocks in various sectors. While the very high ROE in energy right now is driving much of the trend, we see that many other sectors are at historically high levels also.



It seems likely to me further expansion in ROE is increasingly unlikely, and should not be counted on to help drive overall market earnings growth.


Data source: AAII Stock Investor Pro database with a handful of tickers excluded due to incomplete or missing data.