Global| Jul 26 2019The "Truth" on Profits – No Gain in Operating Earnings for the Past 5 Years
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Summary
The happy prophecy of endless growth in the economy generating a continuous flow of strong corporate earnings just ran into trouble—the "truth" on profits. According to GDP data released today Q2 corporate earning posted their largest [...]
The happy prophecy of endless growth in the economy generating a continuous flow of strong corporate earnings just ran into trouble—the "truth" on profits. According to GDP data released today Q2 corporate earning posted their largest decline annual decline in several years, and the revised data shows that there has been no growth in operating profits for the past 5 years.
Q2 Real GDP bettered analyst's expectations growing 2.1% annualized, driven by strong gains in consumer and government spending. Yet, the gain in GDP did not flow to the bottom line for companies.
According to the preliminary Q2 GDP results, implied operating profits for the period totaled $1,900 billion, down 5% from Q1, which would represent the third consecutive quarterly decline, and off over 7% from the year ago levels, one the largest declines recorded in several years.
Yet, as ugly as the Q2 numbers appear to be on the surface, what are even more troubling are the sharp downward revisions for the last two years. According to the annual GDP revisions operating profits for 2017 were lowered by $93 billion, or 4.4%, and profits for 2018 were reduced by a whopping $188 billion of 8.3%.
The revised numbers of corporate profits show that operating profits peaked in Q3 2014 and have been moving sideways even since. Operating profits in the GDP accounts and S&P 500 operating profits over the long run track fairly close to one another, although there can be large differences in any given year. Yet, a flat trend for 5 years in operating profits should not be overlooked or ignored especially since during this period S&P 500 share prices have increased over 50%.
Operating profits, or profits from current production, are the purest form of corporate earnings since this series puts all firms on the same accounting framework and the profit numbers are not adjusted for the number of shares outstanding; the latter which is often reported by S&P 500 companies for equity investors.
The argument being used by equity analysts and strategists that the equity market is cheap or inexpensive relative profits appears to be dubious in light of revised data on operating profits, and it suggests that the "actual " market multiple is a lot higher than what is being reported by analysts.
Viewpoint commentaries are the opinions of the author and do not reflect the views of Haver Analytics.
Joseph G. Carson
AuthorMore in Author Profile »Joseph G. Carson, Former Director of Global Economic Research, Alliance Bernstein. Joseph G. Carson joined Alliance Bernstein in 2001. He oversaw the Economic Analysis team for Alliance Bernstein Fixed Income and has primary responsibility for the economic and interest-rate analysis of the US. Previously, Carson was chief economist of the Americas for UBS Warburg, where he was primarily responsible for forecasting the US economy and interest rates. From 1996 to 1999, he was chief US economist at Deutsche Bank. While there, Carson was named to the Institutional Investor All-Star Team for Fixed Income and ranked as one of Best Analysts and Economists by The Global Investor Fixed Income Survey. He began his professional career in 1977 as a staff economist for the chief economist’s office in the US Department of Commerce, where he was designated the department’s representative at the Council on Wage and Price Stability during President Carter’s voluntary wage and price guidelines program. In 1979, Carson joined General Motors as an analyst. He held a variety of roles at GM, including chief forecaster for North America and chief analyst in charge of production recommendations for the Truck Group. From 1981 to 1986, Carson served as vice president and senior economist for the Capital Markets Economics Group at Merrill Lynch. In 1986, he joined Chemical Bank; he later became its chief economist. From 1992 to 1996, Carson served as chief economist at Dean Witter, where he sat on the investment-policy and stock-selection committees. He received his BA and MA from Youngstown State University and did his PhD coursework at George Washington University. Honorary Doctorate Degree, Business Administration Youngstown State University 2016. Location: New York.