It's challenging to get a clear view on the directionality of stock prices, which are supposed to represent the Present Value of all future company earnings. Stock price forecasting is made even more challenging due to the obscurity of Non-Operating Expenses. Unlike other expense categories for businesses, Non-Operating Expenses (usually found at the bottom after Operating Earnings, on the Income Statement) are typically segregated from the Operating Earnings calculation . As a result, trending higher Non-Operating Expenses, like debt service, is difficult to assess even at the individual company level. The accompanying graph illustrates the percentage change since September 30, 2018 of three related metrics on this subject.
We've noticed how S&P 500 Operating EPS and US Corporate Debt have similarly increased (at the end of Q1'2023) by around 27% & 33%, respectively. However, the both current and projected increases in debt service expenses for companies are not accounted for in the Operating Earnings figures. Therefore, it's possible that when CFOs are faced with a choice between spending on Operating Expenses, like payroll, versus Non-Operating Expenses, like debt interest, they would favor cutting payroll. Payroll expense reduction has a direct, positive impact to Operating EPS. You could term this as a form of "fancy math", but it's simply part of the complexity of U.S. GAAP. In doing so, CFOs could manage the Income Statement to show higher Operating Earnings, while also increasing their spending on Non-Operating Expenses (in this example, debt service) to maintain their credit ratings. In essence, companies could report higher Operating Earnings while the U.S. Unemployment Rate trends higher. Ultimately, this course of action by CFOs could be eventually welcomed by shareholders due to potential long-term increased operational efficiency and output productivity.