False prosperity? Except for large enterprises, the profits of all other companies in the US stock market have experienced negative growth!
The decline in overall economic profits usually precedes the decline in stock market profits, just like a precursor to an economic recession
The new round of earnings season in the US stock market has kicked off, with people talking about strong profit growth, but in reality, profits have not increased at all.
On Wednesday, according to data from Bank of America, although overall earnings growth for the US stock market in the third quarter is expected to reach 4%, this is entirely attributed to the 7 largest companies with a 19% profit growth (lower than 37% in the second quarter and 55% a year ago), while the rest of the companies in the S&P 500 index (about 493 companies) are expected to see flat earnings for the third quarter!
Bank of America stated that the overall picture is distorted by a few large and mega-cap stocks.
Apart from the largest companies in the US, all other companies are showing weak profit growth;
Looking at the S&P 1500 index, if only the top 10% of companies are excluded, profits remain flat. However, if the top 50% are excluded, profits will sharply decline. This situation is confirmed by the Russell 2000 small-cap stocks and small unlisted companies surveyed by NFIB.
The decline in overall economic profits usually precedes the decline in stock market profits, much like a precursor to an economic recession.
In response to this, Albert Edwards from Societe Generale in France pointed out:
Overall economic profits often lead the economic cycle, with profit declines typically occurring before an economic recession, forcing companies to cut back on business investment (including inventories) and hiring. However, any profit decline does not immediately manifest at the stock market level, as CFOs have ample ways to "boost" expected earnings.
The strong profits of US companies are a key reason why the corporate sector is able to sustain employment and investment spending, but it is worth noting that post-pandemic, despite a significant increase in unit costs, profit margins have also risen significantly, which is unprecedented, as an increase in unit costs has historically led to a decrease in profit margins