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U.S. Corporate Profits: Wow, But It Will Get Tougher From Here – September 6, 2022

A just-published report examined the stellar performance of U.S. corporate profits. Although the growth rate has peaked, the coming deceleration should be moderate rather than pronounced.

The U.S. corporate sector continues to fire, with profits surging in the second quarter to an all-time high relative to GDP, underscoring the extraordinary pricing power and global prominence of U.S. corporations. Profits have benefited from a combination of strong revenue growth and improving relative pricing power to a greater extent than at any time in recent decades, and U.S. companies have gained market share in both the domestic and global marketplace.

Nominal revenue growth will slow from elevated levels, which will likely translate into lower profit margins, Nevertheless, the odds of a major earnings contraction for the U.S. corporate sector remain low on a 6-12 month horizon, and thus profits should continue to provide meaningful support for equities even as the Fed continues to hike interest rates through yearend. In the end, ever-tightening monetary conditions and higher bond yields may ultimately undermine the equity market, but so far profits should not be a source of stress. Stay tuned.