Corporate Profits Lift Up Growth Estimate
Strong Consumer Spending Boosts Economic Growth
Corporate profits jumped 0.6% in this quarter and 8.5% on a year-over-year basis
Healthy GDP growth helps to generate more business earnings. Profits from current production increased $70.4 billion in the second quarter, as against a decline of $123.0 billion in the first quarter. Domestic financial corporations’ profits have risen $34.6 billion in the second quarter, as compared to a decrease of $23.4 billion in the first.
Insurance stocks such as Cincinnati Financial (CINF) and Reinsurance Group of America (RGA) were up 12.9% and 12.2%, respectively, over the past year as of September 25. Also, banking services companies Signature Bank (SBNY) and First Interstate Bancsystem (FIBK) were up 22.5% and 4.21%, respectively, for the same period.
The retail trade industry is a spoilsport
A decrease in profits from the retail trade industry partly offset a $24.3 billion increase in profits of domestic nonfinancial corporations. The SPDR S&P Retail ETF (XRT) is down 5.7% year-to-date to $45.3 as of September 25. Over the past week, retail stock Burlington Stores (BURL) was down 5.4%. Although a small increase in manufacturing activities occurred due to a rise in durable goods, it was offset by a decline in nondurable goods in this quarter.
Corporate profits after tax have jumped $39.2 billion in contrast to a decrease of $128.4 billion. Dividends have increased by a mere $1.2 billion in the second quarter, compared with an increase of $6.3 billion in the first. As of September 25, the iShares Select Dividend ETF (DVY) has been down 5.0% over the past three months.
Fixed investments increase with growing optimism
Sustainable corporate profits are usually an outcome of capital investments made by businesses and good strategy. The fixed investment rose 5.2% in this quarter with residential and non-residential investment spending contributing 9.3% and 4.1%, respectively. Both residential and non-residential investment spending are highly sensitive to business cycles. An increase in corporate profits and an optimistic future outlook allows companies to incur capital investments, suggesting that the economy is healthy and can generate more business earnings.
While business optimism seems to be growing, consumer sentiment continues to be impacted by falling crude prices and global volatility, as we’ll discuss in our next article.
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