Feb 23, 2023 - Economy

Corporate America’s profit rocket hits headwinds

Data: Refinitiv; Chart: Axios Visuals
Data: Refinitiv; Chart: Axios Visuals

Corporate America's gangbusters' profit growth has stalled out.

Driving the news: With results in from virtually all of the S&P 500, the blue-chip index looks like it earned about $54 per share during Q4 2022, according to data provider Refinitiv.

The big picture: This drop of just under 1%  marks the end of a remarkable run of post-pandemic profit growth for American corporations.

  • Real talk: Even though growth has gone slightly negative, corporate profits are still really high.

The backstory: Over the last couple of years, U.S. companies have made incredible amounts of money as inflation allowed them to raise prices, jacking up profit margins to levels not seen in over 70 years.

Data: Refinitiv; Chart: Axios Visuals
Data: Refinitiv; Chart: Axios Visuals

But, but, but: During the last few weeks, executives have warned that as inflation slows, they're having a harder time raising prices, meaning margins are now shrinking.

  • Home Depot's stock got hammered Tuesday after reporting results and issuing just such a heads-up about margins in the coming year.

Be smart: This might sound like bad news. And for some shareholders, it might be. But the reality is, corporate profits don't actually say all that much about the health of the broader economy.

  • That's because the most pertinent part of earnings reports for economy-watchers is the so-called top line — sales, or revenues, depending on what you want to call them.
  • Revenues are more closely aligned with a country's GDP performance — or total economic output — than profits are.

What they're saying: "Corporate revenue trends are consistent with positive but below-potential economic growth," wrote Goldman Sachs analysts in a note published Tuesday. "The pullback in earnings and earnings expectations is not particularly concerning for the broader economic outlook."

The bottom line: The recent run of earnings reports basically told us the economy is exactly where we thought it was: growing but more slowly than last year.

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