Believe It Or Not, Corporate Profits Are Hitting An All Time High Right Now

Interesting observation from Deutsche Bank:

Based on our projections, corporate profits are poised to reach an all-time high in Q3 2010, thereby surpassing their previous peak of $1.66 trillion in Q3 2006. The official data on economy-wide corporate profits are reported on November 23, when the next update on Q3 GDP is released. (For a more detailed description of how we reach this estimate, see the current US Economics/Strategy Weekly.) The recovery in profits has been astounding: since the Q4 2008 low, they have grown for six consecutive quarters at an annualized rate of 38.1%. This is the fastest six quarter change in corporate profits in history, surpassing the 36.0% rate for the six quarters ending Q2 1984.  Some slowdown in profit growth is inevitable, as companies cannot continue to produce the kind of profit gains that we have recently experienced indefinitely. At the moment, there does not appear to be much of a slowdown in the current quarter.

One way to gauge the pace of corporate profit growth is to track corporate tax receipts, similar to what we do with employee tax withholding receipts. Like the latter, corporate tax receipts are extremely volatile, so they have to be smoothed and then seasonally adjusted.  While corporate tax receipts are down modesty from their peak rate of 45.5% in late May, they continue to remain robust through early November (up 35.2% as of November 5th), and they actually appear to be reaccelerating. This is a noteworthy development given how strong corporate tax receipts have been to this point and the fact the year-over-year comparisons are getting progressively tougher. The strength in corporate tax receipts also hints that underlying corporate pricing power is improving—how can companies generate this kind of profit growth on cost cutting alone?  Lastly, since profits are a leading economic indicator, their strength speaks to continued capex gains and a faster pace of hiring over the medium term. Given the corporate tax receipt trend, it is little surprise that the stock market rallied so sharply over the past couple of months and furthermore why this is likely to continue; corporate profits are booming.


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