Thursday, March 29, 2012

Profits: Strong Growth May Be Over

The Lehmann Letter (SM)

The headline economic news this morning is GDP's strong 3.0% growth in 2011's final quarter.

Of greater interest to this letter is the estimate of last quarter's after-tax corporate profits. They were $1,493.9 billion, down slightly from the previous quarter.

Let's discuss this in light of yesterday's report that manufacturing profits and profit margins have fallen slightly. Place the most recent number on the chart and it seems that profits for all businesses may have reached a plateau of about $1,500 billion. That’s bad for the stock market.

Corporate Profits
(Click on chart to enlarge)

(Recessions shaded)

Yesterday's letter reported that manufacturing profit margins had fallen slightly. The chart below shows that profit margins for all businesses also have topped off.

Corporate Profits Margins
(Click on chart to enlarge)

(Recessions shaded)

All of these observations reinforce yesterday's conclusion: The strong season of corporate-earnings growth is over unless there are robust gains in sales volume. Profit margins have reached their limit.

This dims the stock market's outlook.

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© 2012 Michael B. Lehmann

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