Record-High Corporate Profits in QII: The Mother's Milk of Stocks, Business Success and Job Creation
The chart above shows quarterly "Corporate Profits After Tax with Inventory Valuation Adjustment and Capital Consumption Adjustment" (BEA data here) from 1990 to 2010 (inspired by Scott Grannis's recent post). The red line represents profits in nominal dollars (billions) and the blue line represents inflation-adjusted profits using the Business Sector: Implicit Price Deflator (data here). Comments:
1. Nominal corporate profits in the second quarter reached almost $1.2 trillion, which is an all-time record high, and 54.5% above the recent bottom of $774.6 billion in the fourth quarter of 2008.
2. Nominal corporate profits have now doubled in less than ten years, from $600 billion at the end of 2001 to the current level of $1.2 trillion. The S&P 500 Index is actually lower now (1047) than at the end of 2001 (1148).
3. Quarterly profits have been growing at an average annual rate of 30% over the last six quarters, which would suggest that the equity market is extremely undervalued (see Scott Grannis' comments here).
4. On an inflation-adjusted basis, real corporate profits are slightly below the $1.2 trillion record in 2006, but 53% above the QIV bottom.
5. For either measure of corporate profits, it's clear that there has been a complete V-shaped recovery from the 2007-2009 recession, and the record-high profits would be completely inconsistent with any chance of a double-dip recession.
6. Larry Kudlow has frequently reminded us that corporate profits are the "mother’s milk of stocks, business success, and job creation." In that case, the record-high profits of American companies suggests that the U.S. economy is doing better than the "economic hypochondriacs" keep telling us, and we could be poised for an economic boom for stocks, businesses and job creation.