The Illusion Of Profitability
Corporate profits have surged since the end of the last recession which has been touted as a definitive reason for higher stock prices. While I cannot argue the logic behind this case, as earnings per share are an important driver of markets over time, it is important to understand that the increase in profitability has not come from strong increases in revenue at the top of the income statement. As the chart below shows while earnings per share has risen by over 200% since the beginning of 2009 – revenues have grown by less than 10%.
As expected, since the economy is 70% driven by personal consumption, GDP growth and revenues have grown at roughly equivalent rates.
Therefore, the question as to where corporate profitability came from must be
answered? That answer can be clearly seen in the chart below of corporate
profits per worker which is at the highest level in history.
Suppressed wage growth, layoffs, cost-cutting, productivity increases, accounting gimmickry and stock buybacks have been the primary factors supporting the illusion of surging profitability. However, these actions are finite in nature and, inevitably, it will come down to topline revenue growth.
However, since consumer incomes have been cannibalized by suppressed wages and interest rates – there is nowhere left to generate further sales gains from in excess of population growth.
So, while the markets have surged to “all-time highs,” for the majority of Americans who have little, or no, vested interest in the financial markets their view is markedly different.