American corporate profits appear to be "running out of steam", says Buttonwood in The Economist. They had recovered after the crisis and are close to a post-war record as a proportion of GDP.
But first-quarter S&P 500 earnings estimates were revised down by more than 4% between January and March, and profit warnings have been unusually plentiful.
Remove the effect of one-off items, such as a big write-downs the year before, and you will see that year-on-year profit growth is falling, according to Morgan Stanley Capital International. And a quick rebound looks unlikely.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
While revenue growth has been gradual, profit margins are near record highs and due to fall, says Doug Kass of Seabreeze Partners Management. "We've had years of fixed-cost reductions by corporations and that's basically over, because they've cut to the bone."
There is scant additional scope for bolstering productivity and the labour market should gradually tighten, raising staff costs. The picturein America, which sets the tone forworld markets, isn't offset by especially strong outlooks elsewhere.
In Britainand the eurozone strong currenciesweigh on earnings. In Europe thishelps explain why profits have yet to rebound convincingly despite the economic recovery.
In many stock markets, companies derivea growing proportion of profits fromemerging economies, many of which have been slowing and undermining multinational companies' earnings through falls in their currencies.
All this adds up to a lacklustre future backdrop for global profit growth, which has already disappointed: in 2013, it reached 7%, compared to forecasts of 12% at the beginning of the year; in 2012 it hit just 2%, while the initial estimate was 11%.
Global stock markets have been "remarkably resilient" despite unimpressive earnings, soaring by 13% and 24% in 2012 and 2013 respectively, says Buttonwood.
But lacklustre earnings are now going to become ever harderfor investors to ignore which isanother reason to fear that this rally, already the fourth biggest and fifth longest for the S&P 500 since 1928, ison borrowed time.
-
What is the 25% pension tax-free cash - and when should you take it?The 25% tax-free cash that savers can take from their pension pots got plenty of airtime in the run-up to the Autumn Budget, with speculation that it could be cut or axed. But, what is it and how does it work?
-
Pension warning: one in five don’t know how much is going into their pensionHow to check your pension contributions and why it matters
