Corporate Profits Commentary

Fortune published an article on September 26 titled “Corporate Profits:  Not as good as they seem.”  The article discusses trends in S&P500 profit margins, and whether the current level of corporate profits are sustainable.  Also included in the article is a graphic displaying “Average Profit Margins of S&P500 Companies” on a trailing 12-months basis.

An excerpt from the article:

Margins, the percentage of each sale that ends up as profit, as measured by GDP, have never been this high. They hit a record near the beginning of 2011 and have continued to march up. At the end of June, corporate profit margins were 11.5%. That’s two percentage points higher than the roughly 9.5% they peaked at in 2006.

As a result, the general conclusion is there is nowhere for profit margins to go but down. That’s bad news at a time when the economy is growing so slowly. Even if the economy continues to improve, companies, after years of cost-cutting — a main reason why margins are so high — will have to hire. Actual profits are sure to fall.

But strategist and economist Ed Yardeni thinks profit margins, at least the ones that matter most to the market, may not be as high as everyone assumes. He says that while overall profit margins are the highest they have ever been, the profit margins of the companies in the S&P 500 (SPX) are not that out of line from other economic rebounds.

The average after-tax profit margin of the companies in the index was 8.5% at the end of the June. That’s below the 9.5% they hit in early 2007. What’s more, profit margins for the S&P actually fell last year, and that didn’t seem to upset the market. Stocks were still up over 12% in 2012, and another 19% this year as well, though margins have been climbing again.

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