Features

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.

Even more expensive stocks

Recommended

How long can the good times roll?
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
The British equity market is shrinking
Stockmarkets

The British equity market is shrinking

British startups are abandoning public stockmarkets and turning to deep-pocketed Silicon Valley venture capitalists for their investment needs.
8 Nov 2019
Why Wall Street has got the US economy wrong again
Economy

Why Wall Street has got the US economy wrong again

The hiring slowdown does not signal recession for the US economy. Growth is just moving down a gear, says Brian Pellegrini.
25 Oct 2019
Cash rich and bored? Be careful what you do with your money
Investment strategy

Cash rich and bored? Be careful what you do with your money

As the pandemic has left many people with more time on their hands but little opportunity to spend, they have been speculating in the markets. But don…
19 Oct 2020

Most Popular

The Bank of England should create a "Bitpound" digital currency and take the world by storm
Bitcoin

The Bank of England should create a "Bitpound" digital currency and take the world by storm

The Bank of England could win the race to create a respectable digital currency if it moves quickly, says Matthew Lynn.
18 Oct 2020
What would negative interest rates mean for your money?
UK Economy

What would negative interest rates mean for your money?

There has been much talk of the Bank of England introducing negative interest rates. John Stepek explains why they might do that, and what it would me…
15 Oct 2020
Last chance to secure a Bounce Back loan for your small business
Small business

Last chance to secure a Bounce Back loan for your small business

The government’s Bounce Back loan scheme will only run for another six weeks. Act now if you need to take advantage of it.
16 Oct 2020