With today's revisions to third quarter GDP came the first look at corporate profits, and they were huge. Profits after tax are up 16% since the end of last year. This chart compares profits to GDP; note that the scales on both y-axes are similarly calibrated. What jumps out to me is that despite a wrenching recession, corporate profits today have risen substantially more than nominal GDP since the 2001 recession. Profits have essentially doubled in the past 8 years, while nominal GDP has increased by 40% and the S&P 500 has made no progress at all. It would be quite difficult to conclude from this that equities are overvalued, in my opinion.
Something must be broken...
ReplyDeleteThe 25 year average ratio (taking
ReplyDeleteout the insanity of stock prices between 1997 and 2001) for the S&P
500 to NIPA corporate profits after tax is 1.20. Today's number puts the ratio at 1.06. There is more room to run. In fact the corporate net cash flow to after tax corporate profits is quite wide implying further upward movement in corporate profits.
The 50 year ratio of profits to GDP is 6%, with the range going from 3.8% to 8.6%. The Q3/09 number is 7.2%.
ReplyDeleteGood point...do you believe the
ReplyDeleteprofits to GDP will revert to the mean and if so will GDP grow faster
or profits grow slower??
Scott,
ReplyDeleteWhat I can't figure out is if profits are up, why are corporate taxes down OVER 60% in Q3?
alstry: I'm not sure what you're referring to. According to the BEA, corporate income taxes rose $6.7 billion in the third quarter.
ReplyDeletehttp://www.bea.gov/newsreleases/national/gdp/2009/gdp3q09_2nd.htm