Are corporate profits about to take off?

July 27, 2009

Jim Paulsen of Wells Capital Mangement points out that companies have cut to the bone in preparation for near-depression. This could result in some spectacular profit numbers ahead (and check out the chart below) — assuming no near-depression:

Second quarter earnings reports have reflected this new trend where a number of companies have thus far surpassed earnings estimates even though sales remain weak. As economic recovery brings renewed top-line growth, corporate profits may continue to amaze and outpace expectations during this recovery. Chart 4 illustrates a fairly good “leading indicator” (by one year) of profit growth based on profit leverage. The dotted line is the multiplicative sum of the business productivity index, the labor unemployment rate and the factory unemployment rate. Essentially, when businesses focus on “rightsizing” (by improving productivity and purging payrolls and factory capacity), about one year later, corporate profits have tended to rise. The dotted line leads profit growth (solid line) by one year and currently forecasts about a 45 percent advance in nonfinancial profits in the coming year! Did the surge in fears produced by the subprime debt crisis cause U.S. businesses to act in ways
which may now lead to a “profit leveraged” bull market?

072709profitchart

One comment

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I understand rightsizing leading to an increased bottom line, but so far there is no indication of a top line growth; and the top line growth is the only indicator of a growing economy. We’re far from it and it appears everyday we’re closer to a jobless recovery [jobless stabilization].

Posted by Hank Reardon | Report as abusive