Musings on Markets: The Earnings Test

This article analyzes global profitability trends in 2022, examining how inflation affected earnings across geographies and sectors, and demonstrating that nearly 70% of listed companies earned returns below their cost of capital. The author argues that value creation requires not just profits but excess returns above the opportunity cost of capital, and that rising risk-free rates and equity risk premiums in 2023 have significantly increased the hurdle rates businesses must clear.