Corporate Profits Slowdown Hasn’t Caught Up To Stocks Yet

Paban Raj Pandey

Growth in U.S. corporate profits with inventory valuation and capital consumption adjustments dipped into the negative territory in 3Q15 – both quarter-over-quarter and year-over-year.

At a seasonally adjusted annual rate of $2.06 trillion, they compared with $2.08 trillion in 2Q15 and $2.16 trillion in 3Q14.

Post-Great Recession, corporate profits have dropped year-over-year three times. The 4.7-percent drop in 3Q15 is the largest since 2Q09, when corporate profits fell 4.9 percent (see chart 1 below).

This is also the first time since 2008 that profits are on course to dropping in 2015 –  be it operating earnings of S&P 500 companies or corporate profits measured by the BEA’s national income and product accounts.

corporate profits history by quarter year over year percent decline gain chart

In chart 2 below, for 2015, consensus estimates of $106.80 for S&P 500 companies have been used, while for corporate profits 3Q15 numbers have been used. It is possible when it is all said and done, 4Q15 will look a whole lot different from 3Q15, but the trend is in definite deceleration.

2015 corporate profits deceleration chart by quarter

NIPA’s corporate profits have declined 4.7 percent since the 3Q14 peak. Similarly, the four-quarter rolling total of operating earnings of S&P 500 companies peaked in that same quarter at $114.51. Four quarters later, in 3Q15, they were $104.15.

In chart 3 below, for 3Q15, $25.44 (as of November 12th) has been used. The quarter produced the largest y/y drop in the past four quarters. Operating earnings have dropped the past four quarters – first such occurrence since 2007-2009.

Chart 3 also shows a close relationship between earnings trend and the S&P 500 index. The green line seems to be trending lower in keeping with earnings deceleration. But the chart uses quarter-end price (1920.03). If we use yesterday’s price for the S&P 500, the green line will have completely diverged from the red bars.

operating earnings dropped 4 consecutive quarters chart 3q 2015

Hence the question, what exactly is the message coming out of the S&P 500?

If stocks are telling us that the economy is all set to accelerate next year, that oil stabilizes here and that the dollar begins to weaken, then a case can be made that corporate earnings can improve next year. But how likely is that?


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