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America's corporate earnings bubble hisses air

America's long bull market in stocks has rested on booming corporate earnings. But forecasts are gloomy.

Amazon Fulfilment Centre worker © Jeff Spicer/Getty Images

Amazon's wage hikes reflect higher labour costs, which are squeezing profit margins

"America Inc. mints $1bn every five hours," says The Economist. The long bull market has rested on booming corporate profits, which are up 455% over the past 25 years. A third of every dollar made by firms worldwide is now accounted for by US businesses. Yet "the era of relentlessly expanding profits is under threat".

Last week marked the start of the second-quarter earnings season, the multi-week period that sees US firms report their most recent profits. The forecasts are gloomy. At the start of the season FactSet data predicted a 1.9% year-on-year decline in the average [second-quarter] earnings of S&P 500 companies. Because earnings fell 0.3% in the first quarter on a year before mainly due to Trump's corporate tax cuts falling out of the annual comparison that has sparked talk of an "earnings recession", defined as two consecutive quarters of falling earnings.

The final results will be better than expected, says Justin Lahart in The Wall Street Journal. Wall Street tends to "lowball" estimates so that it can then celebrate an "earnings beat". Yet even so the final figures "are unlikely to fit anyone's definition of good".

The market is not the economy

The question now is whether the threatened earnings recession could trigger a recession in the real economy, says Paul Davidson for USA Today. "Companies whose profits are squeezed tend to pull back hiring and investment." Another worry is that many American businesses cannot afford to see their earnings sag, says The Economist. "As a share of GDP, corporate debt is nearly where it was before the subprime bubble burst in 2008." That leaves many overly leveraged businesses dangerously exposed.

Actually, the US economy seems pretty robust, says Lahart. The corporate earnings slump has been driven by slowing global trade and a strong dollar, which chip away at the value of overseas sales. But don't confuse American business profits with the American economy. For consumers, rising wage growth and low inflation bode well.

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