Corporate profits are very healthy

Corporate profits are the mother's milk for equity prices, and they are stronger than ever relative to the size of the economy. No wonder the stock market has done so well in recent decades.

Chart #1

Chart #1 compares corporate profits ( (adjusted, and ex-Fed profits) to nominal GDP. According to the Q4/25 GDP estimates released today, corporate profits at the end of last year were up 8.4% from a year ago, and they totaled $3.6 trillion at an annualized pace.

Chart #2

Chart #2 shows the ratio of corporate profits to nominal GDP. As of the end of last year, profits were a record-setting 11.5% of GDP. Wow. Just Wow. And it's not just a recent phenomenon. As the chart also shows, relative to the size of the economy, profits in recent years have been running twice as strong as they were in they were in the 80s and early 90s.

Chart #3

Chart #3 shows the long-term path of the S&P 500 index, as compared to an 8% annualized trend. When you add dividend yields of 1-2% per year, buying and holding stock in the country's 500 largest and most successful corporations has yielded about 10% per year since 1950.

Of course, there are times when returns have been far less than 10% per year, and far greater. If you bought stocks in October 2000, you wouldn't have broken even for almost 7 years. In contrast, buying stocks in April 2009 (at the bottom of the Great Financial Crisis) would have delivered annualized returns of almost 15% plus dividends. I was a few months early when in December 2008 I argued that investing in stocks was the buying opportunity of a lifetime.

In any event, these three charts suggest that stocks today are neither very cheap nor very expensive from an historical perspective.