2013-02-07
We have had quite a run of corporate profitability in this cycle, which goes back to July 2009. Profits as a percentage of the US economy have grown to record levels, and profit margins in the Standard & Poor’s 500 Stock Index have sustained themselves at twice the long-term (50-year) average. These trends are quite important when you consider that since World War II, we have not experienced a recession during which profits and/or profit margins have been on the rise.
The skeptics have been saying that profits and margins are about to shrink back to long-term averages. I don’t think that is the case. In fact, I believe that the S&P companies will continue to generate better fundamentals — profits, cash flows, margins, etc. — for at least a good part of this year.
When making their case, these profit skeptics look first at labor. Indeed, labor and benefit costs make up about two-thirds of the total costs of publicly traded companies. So labor is the first place to look for profit trouble. The skeptics say we are due for labor cost increases. Yet, in this fourth year of the business cycle, the evidence is clear: Unit labor costs and labor costs in general are not rising with any fury. Unit labor costs are contained and productivity runs high.
Second, the skeptics say that profits will fall because revenues are weak and the world growth story is over.
Well, we are taking a good look at fourth-quarter earnings and revenues from the S&P 500, and we are seeing that revenues are already rising, not flattening out. Is this perhaps a sign that world growth is not sputtering and may even be improving?
Also, there are more tea leaves in the fourth-quarter earnings of publicly traded US companies that need to be looked at. We are seeing margins hold together very nicely, and they are now as high or higher than last year in many sectors, including financials, consumer discretionary, materials, consumer staples and technology ( if Apple is taken out).
If the great profit story of this expansion were ending, we might have seen it in the numbers from the fourth quarter of 2012, when recession reigned in Europe, China struggled with its lowest growth in years and Brazil and many other emerging markets were in a slowdown. We didn’t see a profit slump or margin erosion. And overall we haven’t uncovered any evidence that the profit story is ending.
The markets’ recent upward trajectory is still supported by hard fundamentals. And, based on the tea leaves in company reports, it doesn’t seem that recession or a market collapse is coming soon.
No forecasts can be guaranteed.
The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.
24070.64
This profit story's not over yet
We have had quite a run of corporate profitability in this cycle, which goes back to July 2009. Profits as a percentage of the US economy have grown to record levels, and profit margins in the Standard & Poor’s 500 Stock Index have sustained themselves at twice the long-term (50-year) average. These trends are quite important when you consider that since World War II, we have not experienced a recession during which profits and/or profit margins have been on the rise.
The skeptics have been saying that profits and margins are about to shrink back to long-term averages. I don’t think that is the case. In fact, I believe that the S&P companies will continue to generate better fundamentals — profits, cash flows, margins, etc. — for at least a good part of this year.
When making their case, these profit skeptics look first at labor. Indeed, labor and benefit costs make up about two-thirds of the total costs of publicly traded companies. So labor is the first place to look for profit trouble. The skeptics say we are due for labor cost increases. Yet, in this fourth year of the business cycle, the evidence is clear: Unit labor costs and labor costs in general are not rising with any fury. Unit labor costs are contained and productivity runs high.
Second, the skeptics say that profits will fall because revenues are weak and the world growth story is over.
Well, we are taking a good look at fourth-quarter earnings and revenues from the S&P 500, and we are seeing that revenues are already rising, not flattening out. Is this perhaps a sign that world growth is not sputtering and may even be improving?
Also, there are more tea leaves in the fourth-quarter earnings of publicly traded US companies that need to be looked at. We are seeing margins hold together very nicely, and they are now as high or higher than last year in many sectors, including financials, consumer discretionary, materials, consumer staples and technology ( if Apple is taken out).
If the great profit story of this expansion were ending, we might have seen it in the numbers from the fourth quarter of 2012, when recession reigned in Europe, China struggled with its lowest growth in years and Brazil and many other emerging markets were in a slowdown. We didn’t see a profit slump or margin erosion. And overall we haven’t uncovered any evidence that the profit story is ending.
The markets’ recent upward trajectory is still supported by hard fundamentals. And, based on the tea leaves in company reports, it doesn’t seem that recession or a market collapse is coming soon.
No forecasts can be guaranteed.
The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.
24070.64
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