Are corporate earnings genuinely wonderful? It may depend on your perspective. For example, after-tax corporate profits have grown at an annualized pace of less than 1% over the last 5 years. You won’t find many 5-year periods that have been as anemic as that.
In the same vein, earnings per share (EPS) growth has been equally unimpressive. Yet stock prices have been climbing with or without corporate earnings support.
One could make a case that corporate profits are just now hitting their stride. Indeed, one might assert that the only thing of importance is earnings acceleration since the fourth quarter of 2016.
Unfortunately, the notion that things are dramatically improving is a “fish story.” Consensus EPS projections for the 3rd quarter have already been slashed; analyst cuts to estimates have been the largest in two-and-a-half years.
Other measures of corporate profitability demonstrate that a profit explosion to the upside is unlikely. For instance, return on equity, which considers how much profit companies generate with the money that shareholders provide, is hitting post-World War II lows.
If corporate profitability is really going to improve in the coming quarters, we’d likely need to see an acceleration on the economic front. Credit expansion would need to pick up rather than slow down. Regrettably, in spite of attractive borrowing costs, banks are lending less to businesses than at any point in the current recovery.
Meanwhile, job growth in key regions of the country have slowed to a crawl. Consider the Northern California counties that serve as the epicenter for high-paying tech jobs – San Francisco, San Mateo, Santa Clara, Alameda, Contra Costa and Marin. Every last one of these feeders to the Bay Area and Silicon Valley have seen job growth weaken considerably. (Note: The chart below is for Santa Clara County, which includes Silicon Valley stalwarts like Palo Alto, Sunnyvale and San Jose.)
