US Corporate Profits

Divergent Path Of US Corporate Profits

Yesterday we got the latest glimpse into US corporate profitability. Depending on the series observed, corporate profits are either flat-lining or rising. Before-tax corporate profits, the blue series in the chart below, are actually net down by $32 billion from the peak in 2014. Yet, after-tax profits are up about $130 billion from that same year. Of course, the recently enacted tax cuts explain the divergence here.

Q1 hedge fund letters, conference, scoops etc, Also read Lear Capital: Financial Products You Should Avoid?

US Corporate Profits

When looking at year-over-year growth rates, the divergence is more easily observed. Pre-tax profits are up about 4.3% from a year ago while after-tax profits are up almost 14% from a year ago.

US Corporate Profits

Both series seem to confirm that peak profit margins for this cycle have come and gone. Pre-tax profit margins peaked in 2014 at just under 13% and now hover slightly over 11%.

US Corporate Profits

With labor income as a share of gross value-added rising (blue bars below), it is likely the signal from pre-tax profits is the correct one. Labor’s share of income has ticked up from about 62% of gross value-added to a bit over 64% since 2014, helping explain the contraction in pre-tax profit margins.

US Corporate Profits

The Trump tax cuts have certainly provided a one-time boost to the level of corporate profits which will linger in the data for another three quarters. But, by the first quarter of 2019 the effect will be gone and after-tax profit growth will converge on pre-tax profit growth. If the tight labor markets continue to pressure the share of national income going to workers, it is likely profit margins continue to contract in a typical late cycle fashion. Beware of the apparent divergence in corporate profits. It won’t last long.

Article by Steven Vannelli, CFA – Knowledge Leaders Capital


Saved Articles

The Life and Career of Charlie Munger

Charlie is more than just Warren Buffett’s friend and Berkshire Hathaway’s Vice Chairman – Buffett has actually credited him with redefining how he looks at investing. Now you can learn from Charlie firsthand via this incredible ebook and over a dozen other famous investor studies by signing up below:

  • Learn from the best and forever change your investing perspective
  • One incredible tidbit of knowledge after another in the page-turning masterpiece of a book
  • Discover the secrets to Charlie’s success and how to apply it to your investing
Never Miss A Story!
Subscribe to ValueWalk Newsletter. We respect your privacy.

Are you an intelligent investor?

ValueWalkPremium is a website and newsletter for smart investors like yourself. We focus on the latest hedge fund industry news much of which is not in the public domain and obtained via our sources.

We also have 10 years of resources on how to use this information to better your investment process.

Sign up for  today for only a few dollars a day and get a 3 day no obligation trial with a targeted 20% discount coupon code.

Cancel anytime during trial and you are never charged.

Limited time offer: For first 50 subscribers