Aug 31, 2018
Corporate profits aren't as great as you think (and might not last)
Companies had a stellar second quarter: profits rose more than 16 percent from last year, according to the Commerce Department. That's great news, right?
Reality check: Look at corporate profits as a share of the economy. That figure is nowhere near its 2012 high point. In fact, the number has not changed that drastically in the last few years.
What's next: The rosy earnings season helped propel stocks to record highs, but some market watchers think the good times won't last. "I really think the big story 6 to 9 months from now is going to be the colossal decline in earnings growth," said Jim Paulsen, chief investment strategist at The Leuthold Group, a research firm.
Here are a few factors that might derail the corporate boom:
- Waning tax cut benefit: Tax cuts automatically boost earnings, but it's much harder for them to boost earnings growth.
- Rising rates: Consumer spending sent inflation to a six-year high, which makes more of a case for the Federal Reserve to continue its plan to raise interest rates. The luxurious years of low corporate borrowing costs might be coming to an end.
- Tariffs: Fears of an escalation of the trade war were a common theme this quarter. Jack Daniel's maker Brown-Forman trimmed its earnings forecast for the year, thanks to the trade war. Retailers, too, are monitoring the situation closely.