A look at company earnings implies it is a great time to be a corporation in America, but for investors a rising savings rate and the threat of deflation mean that, ugly and risky as they are, government bonds looks good in comparison to stocks.
So far it has been a pretty remarkable earning season in the U.S. Almost 80 percent of companies reporting have beaten analysts’ estimates and profits among the largest companies are up more than 40 percent on the same period last year.
Perhaps even more remarkably, companies are managing to trouser a record 10.2 cents in every dollar of revenue after operating costs, according to Standard & Poor’s.
That’s the rub – profitability growth is outpacing revenue growth, which has been 9.0 percent, implying that the gangbusters pace of profits is more due to cost cutting and efficiencies than a sustainable expansion in anyone’s business model.
So far, stock market investors seem to like it. The S&P 500 is up nearly 10.0 percent since its early July lows and has gained about 4.0 percent since the reporting season kicked off in earnest. Then again, earnings seasons are usually kind to stock, suspiciously kind.
It is almost as if someone pulled the plug on the feed of economic news to stock investors while allowing the earnings beat stories to keep on coming.