Wilshire 5000 Valuation Metrics Explained: Wilshire 5000 and Corporate Net Revenue Trends
In The Little Book of Common Sense Investing, John Bogle posits that the overall return on stocks is intrinsically linked to the revenue generated by the underlying companies. This notion aligns with the fundamental principle that owning a stock signifies a partial ownership stake in a business. Nevertheless, market pricing does not consistently reflect a company’s fundamentals. External factors like interest rates, investor sentiment, and speculative behavior frequently impact valuations.
This disconnect was particularly evident during the COVID-19 pandemic, when extensive stimulus measures across the Western world led to a surge in asset prices, not only in equities but also in speculative instruments like cryptocurrencies and NFTs. While these alternative assets may have future value, their valuations were largely unsupported by their underlying fundamentals, as evidenced by their significant decline during the subsequent tightening of monetary policy and rising interest rates.
This article explores the relationship between the total net revenue of corporate America and Wilshire Index. Specifically, it examines how closely these two measures align over time.
Wilshire 5000 and Corporate America Revenue
The graph above depicts the cumulative revenue generated by all corporations that file with the Securities and Exchange Commission’s (SEC) Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. Since companies operate on varying fiscal year calendars, each company’s total net income is distributed proportionally across the reporting period. For instance, if a fiscal year concludes on June 30, 2020, half of the net income is attributed to 2019, while the other half is allocated to 2020.
Only the net income attributable to the parent company is considered, as it represents the portion of earnings belonging to the shareholders of the reporting entity. Income attributable to non-controlling interests is excluded, as that portion belongs to minority shareholders of consolidated subsidiaries. Including it would overstate the parent company’s performance.
In addition, dividends received from other companies are excluded from aggregate net income. This is to avoid double-counting, as the dividend-paying company would have already reported that income on its own income statement. Including dividends received again in the consolidated view would misrepresent the true economic output of the corporate sector.
The Wilshire 5000 Index, which encompasses the total market capitalization of almost all publicly traded U.S. companies, is determined by the float-adjusted market value of its constituent companies. It stands as one of the most comprehensive indicators of the U.S. equity market. The data utilized in this analysis originates from Yahoo Finance.
The chart illustrates a relationship between total net income and average price of the Wilshire 5000, implying a link between market value and corporate fundamentals.
Between 2010 and 2023, the relationship between corporate America’s profitability and the overall market valuation underwent significant transformations. The chart above illustrates this evolution by comparing the cumulative percentage change in total net income of U.S. public companies with the Wilshire 5000 Index, a widely recognized proxy for the entire U.S. equity market. Both metrics are reset to 0% in 2010 to facilitate a clear comparison of relative growth over time.
Over the 13-year period, corporate net income experienced a remarkable growth of 440%, significantly surpassing the 259% gain observed in the Wilshire 5000 Index. Although both series exhibited upward trends during the early years of the decade, the divergence between them became more pronounced after 2020. Notably, net income experienced a dramatic surge in 2021, increasing from 200% in 2020 to 447%. This substantial jump is believed to be attributed to various factors, including post-pandemic reopenings, aggressive cost-cutting measures, margin expansion, and concentrated gains within a few high-performing sectors, such as technology and energy.
In contrast, the Wilshire 5000 experienced steady growth. It reached a remarkable cumulative gain of 273% in 2021 before experiencing a slight decline to 259% by 2023. The index’s relatively subdued reaction to the earnings surge could be attributed to several factors, including macroeconomic challenges, stricter monetary policies, or investor skepticism regarding the sustainability of the profit boom.
This divergence raises significant questions. Conventional wisdom often implies that markets precede fundamentals, with prices rising faster than profits. However, this data indicates the opposite happened during the post-pandemic period—corporate earnings surpassed equity valuations. Instead of being overpriced, the market might have actually underreacted to the robustness of business performance, particularly during the recovery years following COVID-19.