Sunday Spectacle CXXXIII

Corporate Profit Margins Surpass Pre-Crisis Levels

(Data Source: Bureau of Economic Analysis; Chart: The Mays Report, July 31, 2011. Downloaded from SeekingAlpha on July 31 2011.)

There a quite a few corporate profit metrics—pre-tax margin, after-tax, S&P500 companies vs total market, etc—so the results can vary somewhat. According to the data produced by Mays Report, it appears that corporate profit margins have surpassed even the 2007 peak. This is one reason some bears, like me, are really cautious. The valuation looks reasonable—neither overvalued nor undervalued—but the question is whether profits are sustainable. The P/E ratio looks reasonable (for a low-inflation period) because earnings are high but are they sustainable?

Recall that some, in hindsight, admit that the 2007 profit margins were unsustainable. A big chunk of the profits around that period were due to fictitious financial profits yet the current profit margins have surpassed that point (without the assistance of fictitious profits).

I don't think there is anything "fictitious" about the current profit situation. However, what may not last is the high profits earned in emerging markets and in commodity businesses. If corporate profit margins fall, I suspect it will be driven by declining profits from emerging markets. Needless to say, the market doesn't expect that to happen any time soon.