Leverage key driver of divergence amid financials and non-financials

Leveraging - the use of borrowing to increase returns - has been the main driver of the contrasting fortunes between financials and non-financials in US markets. However, as time has passed over the years, each dollar leveraged has produced less return on capital, making it a less profitable strategy

Over the last decade, financial companies have enjoyed strong profit growth. I expect that this statement will have failed to shock readers. However, what is surprising is the extent to which the profits of financials have outstripped those of non-financials. Looking at the US is instructive. We have sourced the data for the 'Master & Servant' chart from Bloomberg and rebased it to 100 in order to illustrate just how the dramatic divergence between the fortunes of financials and non-financials in the US has been, particularly over a 10-year timeframe. While profit growth for financials mo...