The Profits of ‘Corporate America’ Are Scaling Summits

Earnings after taxes are 11 percent of GDP. And they should increase in 2014.

One of the reasons investors returned toward U.S. stock markets in 2013 was the massive rebound in profits of U.S.-based companies. When the Department of Commerce published the growth figures for the third trimester, it appeared that according to certain criteria, the earnings of American companies were at their highest since 1947, when the government started collecting them.

In fact, earnings after taxes of American companies have crossed the threshold of 11 percent of the U.S. gross domestic product between July and September. During the rough patch of the “great recession,” this ratio was no more than 4 percent. It had already reached 10 percent around 1950, but never passed the 8 percent mark until the mid-2000s.

This means that the growth of profits is faster than that of the economy. During the third trimester it was at 8.8 percent relative to the same period in 2012. This is the best rate of growth since the first trimester of 2012. In 2010 the rate of growth in earnings was even better but only because 2009, which served as comparison, was very low.

Improvement in Speculation

These earnings translate well to improved speculation, not only in the U.S. with more confident consumers, but also abroad. Europe, which is coming out of a recession, is progressively allowing companies that are exposed on the old continent to improve their accounts.

“What we have begun seeing in the third trimester is the clear sign that improvements in Europe translate to earnings here in the United States,” assures Carmine Grigoli of Mizuho Securities. According to her, the 83 S&P 500 companies that realize more than 60 percent of their revenue outside the United States saw their earnings drop by 10 percent on average in the first trimester relative to the same period the previous year, and by another 0.4 percent in the second trimester. But they should tally a 3.3 percent increase in profits in the third trimester.

Another factor that boosts business earnings: their capacity to draw on the best part of financial regulations. In the third trimester, taxes paid by all U.S. companies were below 5 percent.

Finally, until recently businesses have clearly limited their investments as well as recruitment, in a fluctuating political context, in order to improve their margins.

For 2014, the analysts polled by S&P Capital IQ expect an increase in earnings upward of 10.7 percent relative to 2013; sales, on the other hand, should not progress beyond 2.3 percent. Therefore, they anticipate yet another increase in the margins of businesses.