Will US profits run out of steam?

America’s biggest companies produced a second successive quarter of double-digit profit growth for the first time since 2011 – but it's hard to be optimistic about where profits are going.

Andrew Van Sickle
By
published
in Features

America's biggest companies, the constituents of the S&P 500 index, have just produced a second successive quarter of double-digit profit growth for the first time since 2011. Earnings rose by 12% year-on-year in the April to June period, compared with 15% in the first quarter. Robust sales, a weaker dollar around half the S&P 500's sales are made overseas and further cost-cutting have all helped. This has buoyed sentiment on Wall Street, which had been reeling from the glaring absence of the Trump administration's widely trumpeted stimulus. Investors "overestimated Trump but underestimated earnings", Christopher Probyn of State Street Global Advisors told The Wall Street Journal.

But while this marks an impressive comeback from the profits recession of 2015-2016, "it's hard to be optimistic about where profits are heading", says Justin Lahart, also in The Wall Street Journal. If wage growth doesn't take off soon, US consumers, who have been depleting their savings to finance expenditure, won't be able to buy so many of their products, implying weaker sales growth.

The alternative, however, is for employers, responding to the tightening labour market, to start paying their staff more. But that means a squeeze on their margins, reducing profit growth too. Firms could offset the higher labour costs to some extent if they had invested in new plants and equipment over the past few years to beef up productivity. Unfortunately, in uncertain times, "companies' knee-jerk tendency is to go into cost-cutting mode rather then buy equipment that might boost efficiency in the future". Expect the momentum behind US earnings growth to fade.

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Andrew Van Sickle
Andrew Van Sickle
Editor, MoneyWeek

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.

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