Another Look At Corporate Earnings

From Bloomberg:

U.S. Profit-Margin Outlook `Extremely Bad': Chart of the Day

Profit margins for U.S. companies are likely to tumble from last quarter’s record, a decline that will lead to much lower earnings than analysts expect, according to economist Andrew Smithers.

“The corporate sector’s outlook is extremely bad,” Smithers, founder and chairman of the investment-advisory firm of Smithers & Co., said last week in an interview. “I can’t see any way out of it.”

As the CHART OF THE DAY shows, profit before interest, taxes and depreciation -- accounting adjustments for wear and tear on buildings and equipment -- amounted to 36.4 percent of U.S. corporate output in the first quarter. The calculation was based on data compiled by the Commerce Department.

The percentage was the highest since the department’s quarterly data started in 1947, as the chart depicts. Smithers, whose firm counsels more than 100 clients on international asset allocation, included a similar illustration in a June 18 report.

Margins “are likely to fall a lot” as governments restrain deficit spending next year, reducing cash flow elsewhere in the economy
, the report said. Companies will bear the brunt of the shift as opposed to households, which are heavily in debt and save relatively little, in his view.


As the graph shows (follow the link) earnings are at a record high 36%. Much of this can be attributed to temporary gains from staff reductions and stimulus spending by government. As governments are forced to become more responsible by the bond market, we can expect earnings to fall back at least to the more typical 28 to 29% range or possibly lower.  This could act as another potential trigger for the bear market to resume.  If so, expect commodities to fall once more.


  1. I was looking for that graph a few weeks ago, when your economist in chief stated that "profits had now recovered" and that US corporation could expect higher profitability in the future. I thought his comment was wrong, although the question is how much of this "excessive" profitability is tied to financial institutions -- which are benefiting from the carry trade?

  2. Sorry the above comment should read "our economist" and not "your economist"

  3. I suspect your suspicions are correct regarding excessive financial institution profits. I have no hard numbers on the amounts, but would venture a guess that the portion could be in the range of a quarter of all profits.


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