As earnings season builds momentum and we risk being swamped with the minutiae of each corporate announcement, I wanted to share a longer term perspective on where company profits stand in relation to both our current and historical economic situation.
First I graph corporate earnings growth since the 1940. I am using the after tax data series from the St Louis Federal Reserve FRED:
In comparison to profits, GDP is a smoother data series.
Which leads to the comparison of the two:
We could continue to add complexity through additional variables but this simple comparison tells an interesting story. Compared to economic activity, corporate profits are stretched to the extreme. If profits are to wiggle higher from here, we need the economy (GDP) to grow. The takeaway seems clear.
I’m working on charting the profits/GDP relationship on several foreign markets as well. That should generate some interesting observations.