The profit test: what 12 years of global earnings reveal about equity value

The stock market runs on expectations. Price-to-earnings (P/E) ratios, discounted cash flow models and earnings forecasts all shape global equity valuations by telling investors what companies are expected to earn.

A new study from Capital Group turns that lens around and asks a different question: looking back, how long did it actually take for companies to earn back their market value in realised profits?

The answer, for the world’s 1,600 largest listed companies, is just under 12 years. That is the headline finding of “Value Watch”, the inaugural edition of the Capital Group Global Equity Study.

The study introduces a metric called the Equity Payback Period (EPP) to test global equity valuations against more than a decade of realised profits.

At the start of 2014, those companies were collectively worth US$35.3 trillion. Between 2014 and 2025, they generated US$36.7 trillion in cumulative profits, surpassing their entire starting market value.

Growth did the heavy lifting

Katharine Dryer, Equity Asset Class Lead, Europe and Asia at Capital Group, says the result reframes how investors should think about valuation.

“A company’s valuation depends not only on the multiple investors pay, but also on whether future profit growth can justify it. Over the past decade, strong earnings growth has repeatedly supported higher market valuations.”

The finding is more impressive than it appears. In 2014, global equities traded on a P/E of 15.9 times, implying a 16-year static payback.

Strong earnings growth compressed that by around four years. The pattern held in earlier periods too: it took 13 years for companies to earn back their US$24.9 trillion 2010 valuation.

More recently, companies have already earned back 45 per cent of their US$54.7 trillion pre-pandemic 2020 value. One in seven has already recouped its entire 2020 valuation.

The EPP is retrospective by design. Unlike the P/E ratio, which reflects expectations about future earnings, it measures what companies actually delivered in the years that followed.

Capital Group applies this framework across sectors and regions, showing where subsequent profit growth justified global equity valuations and where it did not.

The sector split

The research reveals sharp divergence across sectors. The gap between what the market expected at the outset and what companies delivered over time explains much of it.

Banks recorded the fastest EPP globally, earning back their 2017 market value by 2024, just eight years. Rising interest rates from 2022 restored earnings power.

The sector generated US$6.5 trillion in profits since 2017, comfortably exceeding a starting market value of US$5.4 trillion. Oil and gas went the other way. A supply-driven profit collapse in the mid-2010s wiped out early gains, and the sector took 15 years to recoup the 2010 market value.

Technology presents a more nuanced picture. Software profits tripled in seven years to reach US$210 billion in 2025. Yet the sector still took around 12 years to earn back its US$1.3 trillion 2014 market value. High starting expectations explain the gap.

Semiconductors fared better, recouping 2017 values in nine years. Nvidia earned back its 2020 market value in just six years. By 2025, profits were running at around 28 times 2020 levels.

Defensive sectors, including food retail, pharmaceuticals and telecoms, have been the slowest to complete the EPP. Not because they underperformed, but because they delivered exactly what investors expected: steady earnings with limited upside.

The Australia gap

For Australian advisers, the local picture warrants close attention. Australian companies earned back their 2012 market value of US$786 billion over 14 years, two years slower than the global average. One fifth of Australian companies in the study have not yet generated cumulative profits equal to their 2010 market value.

The structural reason is Australia’s heavy cyclical bias. Banking and mining dominate the market, with few structural growth companies in the mix. The commodity boom of 2021-2022 allowed mining groups to achieve faster-than-average payback from cyclically low starting valuations. But conditions turned against them in 2023 and 2024.

Capital Group notes the outlook is now looking more favourable, with the combined market value of Australian companies rising to US$1.4 trillion by April 2026.

Can markets do it again?

Global equities now stand at US$113.8 trillion, priced at around 21 times expected 2026 profits of US$5.4 trillion. That is a meaningfully higher starting point than 2014. It puts global equity valuations at a level where earnings delivery matters more than it did a decade ago. Dryer says the elevated multiple changes the calculus without making markets uninvestable.

“Starting from higher valuations, growth must do more of the work, but companies that deliver can still justify demanding multiples.”

With more weight placed on growth projections, the margin for error is thinner. Companies that miss targets will see it quickly in their share prices. That environment is precisely where active management earns its keep.

“For active investors like Capital Group, it is not about avoiding higher valuations. Our portfolio managers and analysts are focused on where growth is durable and still being underestimated,” Dryer says.

“In a market where outcomes become more sensitive to earnings delivery, active management can add value by identifying companies that meet earnings expectations and those that fall short.”

Rethinking cheap and expensive

The central lesson the data teaches is counterintuitive. “Cheap” and “expensive” are routinely misapplied. A company is cheap in EPP terms if its future profit stream shortens the payback period, even from a high starting multiple. It is expensive if weak or uncertain growth stretches that payback, even if the entry multiple appears low.

The UK market illustrates this precisely. It traded at a persistent discount to the US for most of the past decade, yet it was still the slowest major market to achieve payback.

Earnings growth was the problem, not valuation. Italy, by contrast, achieved one of the fastest paybacks in the world. Not because companies grew quickly, but because valuations were depressed enough that even modest profits closed the gap rapidly.

For the current market, the arithmetic is blunt. At 21 times expected 2026 profits, global equities face a higher hurdle than the 2014 cohort. Matching the same 12-year payback will require commensurately stronger earnings growth. One potential accelerant is artificial intelligence.

Capital Group notes that if AI delivers even part of what is currently expected, it should help margins and lift output well beyond the technology sector. That could shorten the payback period for a wider universe of companies than markets currently price in.

For Australian advisers specifically, the data highlights a structural challenge. The domestic market is concentrated in banks and mining, with few structural growth companies in the mix.

As EPP hurdle risesglobally, the cyclical bias is a meaningful headwind for locally focused portfolios. The implication is not to avoid the home market, but to be clear-eyed about what it can and cannot deliver on its own.

Valuation multiples set the expectation. Earnings growth determines whether that expectation is met. For advisers helping clients assess global equity valuations in a market priced at 21 times forward earnings, the question is not whether valuations are high. It is whether the companies in their portfolios are positioned to justify them.