By James Saft
(Reuters) – U.S. corporate earnings appear as if reflected in a distorting fun-house mirror: profits are huge but revenues strangely shrunken.
Corporate profits have grown strongly, up 2.1 percent among S&P 500 companies reporting first-quarter earnings so far, with 70 percent exceeding analysts’ expectations. At first glance, that looks like a particularly good outcome, especially considering profits compared to the size of the economy are near recent all-time highs. Revenues, however, are falling; down 0.6 percent compared to a year ago, marking the second quarter out of three that cash coming into corporate coffers has shrunk.
Understanding how this unsustainable state came to be and how long it might go on is the key to knowing not just what will happen with stock markets but perhaps with the economy itself.
So, how are companies keeping more and more of the less and less in revenues that flows in their doors? In part through efficiency, but in part the old-fashioned way: by not investing for the future.
Historically profits and investments have been fairly tightly connected, with companies seeing high margins as a signal to invest in new capacity and make more. The extra capacity from the investment means more competition, which in turn drives down margins.