Goldman Sachs Portfolio Strategy Research published a report titled “S&P 500 4Q 2013 ROE update: Substantial improvement to 16.3%” today, March 2nd. The report highlights that the aggregate return on equity (RoE) for S&P 500 (INDEXSP:.INX) stocks continues to improve. The 15.3% aggregate RoE S&P 500 stocks turned in for 2012 seemed pretty tough to beat, but positive consumer sentiment and an improving economy has helped blue chips pull it off, tacking on an additional 1% to make for a scintillating 16.3% RoE for 2013.

S&P 500 ex-Financials RoE climbed to 19.1% in 2013, moving above 19% for the first time since 2012. Financials also put in a strong performance in 2013, with the sector RoE moving up to 10.4%, which is an increase of almost 1.5% since the second quarter of 2012.

GS analysts Stuart Kaiser et al point to improving EBIT margins and low tax rates as the primary reasons for the increase in RoE.

S&P 500 EBIT margins

Low taxes won’t last forever

S&P 500 effective tax rate

The report argues the current historically low 26% corporate tax rate is a major boon to businesses, and that there is significant risk that tax rates will rise sometime over the next couple of years. “Higher EBIT margins and lower effective taxes were the drivers of higher ROE in 4Q 2013 and for the full year. Lower taxes aided ROE in seven of the ten S&P 500 (INDEXSP:.INX) sectors in 2013. Historically low tax rates and discussion of tax reform may be a risk to ROE in coming quarters.”

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S&P 500: Turnover is potential trouble spot

Kaiser and colleagues also point to sales/asset turnover numbers as a potential fly in the ointment of continued RoE growth. “Lower sales/asset turnover was the largest negative for S&P 500 (INDEXSP:.INX) ROE in 4Q. While both sales and assets increased, sales growth did not keep pace with assets. Turnover hurt Financials the most, lowering ROE by 440 bp over the past year, and only Telecom Services and Utilities raised turnover in 2013.”