Profits Are Booming—and That’s Shielding the Economy CEOs are upbeat, and results are on the upswing. The somewhat slower job growth reported last week isn’t the same as a major downturn.
(…) The bulk of U.S. companies have now reported first-quarter results, and they show profit growth is picking up. Earnings per share for companies in the S&P 500 now look to be up 5.2% from a year earlier, according to FactSet, better than the 3.4% analysts expected at the end of March, and marking the strongest growth in nearly two years.
Company results coming in ahead of the estimates is a regular occurrence. More unusually, analysts also spent last month lifting their current-quarter estimates. They now expect second-quarter earnings per share to gain 9.8%, compared with 9% at the end of March. The last time analysts spent the first month of a quarter raising rather than lowering earnings estimates was during the fourth quarter of 2021, according to FactSet earnings analyst John Butters.
Corporate profits are important because they show the U.S. economic engine continues to purr. While some other economic indicators, such as consumer-sentiment readings, have been downbeat, and inflation has ticked up, a strong U.S. profit performance typically points toward continued expansion.
The drift higher in earnings estimates might be because companies, instead of feeling a need to temper analysts’ optimism and nudge estimates lower, are upbeat themselves. Among companies in the S&P 500, the term “recession” showed up in just 100 transcripts of earnings calls, investor events and conferences recorded in the first quarter, according to FactSet. That was down from 302 in the first quarter of 2023, and the fewest in two years.
Survey-based measures of corporate sentiment have picked up. The Business Roundtable’s index of chief executive officers’ economic outlook rose to the highest level in the first quarter since the second quarter of 2022. Indexes of CEOs’ hiring and capital-spending expectations have gained ground. A survey of chief financial officers conducted by Duke University’s Fuqua School of Business with the Federal Reserve banks of Atlanta and Richmond showed a similar increase in optimism.
“There is not a reason if profits are good to retrench,” said the Duke economist John Graham, who directs the CFO survey. Moreover, many CFOs say their companies are still struggling to attract workers.
For now, Graham thinks companies are in the mode of adding workers when the profit outlook is good, and holding employment steady if the outlook becomes shaky, rather than shedding the employees they put so much effort into hiring. So even if earnings do falter, companies might be slow to turn to layoffs. (…)
Initial claims for unemployment insurance—a leading indicator of layoff activity—have remained low. (…)
True for S&P 500 companies.
Not for mid and small caps where profits and margins are not rising as Ed Yardeni illustrates:
And not for very small biz:
- NFIB Job openings are now back in line with levels reached before the pandemic (2017-2019).
- Job creation plans are below what would be typical in a strong growth economy.
- Labor cost reported as the single most important problem for business owners increased 1 point to 11 percent, only 2 points below the highest reading of 13 percent reached in December 2021.
Data: Goldman Sachs 10,000 Small Businesses Voices. Chart: Axios Visuals
Employment reports indicate strong labor markets, but it is less clear where all these jobs are being created. Non-professional services spending is strong, but not strong enough to explain the reported job creation. GDP growth was weak in the first quarter, so where are all those job increases occurring? Small businesses are not reporting net gains in employment. Job reports have been puzzling for some time now, and with an election at hand may remain so until after the election. (NFIB)
Yes, large companies are doing very well, but they are not the economy.
Investors are totally cognizant of these trends (charts courtesy of Ed Yardeni):
- S&P 500/S&P 600
- S&P 100/S&P 500
- S&P 500 equal-weighted/market cap-weighted
Perhaps the real shield to the economy is from the wealth effect from equities and housing.
The economy looks pretty great for Americans who own their own homes — that’s nearly 66% of the population! A record $11 trillion of home equity is “tappable,” meaning homeowners can borrow against it while maintaining at least 20% equity in the house, per the report, which looks at data from March. About 48 million folks have access to tappable equity, with an average of $206,000 per mortgage holder.
Data: ICE; Chart: Axios Visuals
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Royal Caribbean recruiting thousands to meet surging demand, sources say The company confirmed it will hire around 10,000 workers this year
As to employment, so far, so good but recall these charts from recent posts:
Cumulative pandemic-era excess savings
This is helping:
The price of a barrel of West Texas Intermediate crude is falling again today, and at least as of the time I’m typing this it’s right around $77. Just a month ago, it was above $85. (Bloomberg)
Rents Set to Be Last Domino to Fall in Global Inflation Battle
Surging rents across many developed economies are proving to be a stubborn hurdle for central banks as they struggle to nail down inflation once and for all this tightening cycle.
In the US, UK, Canada and Australia, rapidly rising housing costs — which have a hefty weighting in consumer price index baskets — are preventing inflation from declining closer to central banks’ targeted levels. The danger is that workers will demand even fatter pay checks to deal with the cost-of-living squeeze, undermining the inflation fight even further. (…)
“I am confident that as long as market rents remain low, this is going to show up in measured inflation,” Powell told reporters last week after the Fed’s two-day policy meeting. The central bank held rates at a more than two-decade high, while signaling a desire to cut when confident that inflation is under control. Traders are currently betting on at least one 25-basis-point rate cut this year.
Still, Powell may have to wait. Household expectations about the change in the cost of rent have risen sharply from last year, with rental costs expected to increase by 1.5 percentage points to 9.7% for the next year, according to a survey by the New York Fed released Monday. (…)
“Housing is a real problem in the United States due to a huge shortage of affordable housing, and in part because of high interest rates,” Treasury Secretary Janet Yellen told Bloomberg News. “That said, I strongly believe — I think it is highly likely — that shelter costs, which have been pushing up inflation, will come down.” (…)
Mrs. Yellen surely meant shelter inflation because shelter costs never come down. As a labor expert, she should know the tight relationship between wages and rents. People generally chose their abode based on what they can afford, whether they buy of they rent.
ACCURACY MEASURED
Data: UmpScorecards; Chart: Will Chase/Axios
- The Forecasting Record of the Fed and the Market (Apollo)
The Fed started publishing the dot plot in 2012, and comparing the Fed’s forecasts with the forecasts from Fed funds futures yields three important conclusions, see charts below:
1) The Fed’s and the market’s forecasts about the future path of the Fed funds rate are almost always wrong.
2) The forecasts are very similar, and the Fed has managed to anchor market expectations about where it thinks the Fed funds rate is going.
3) The direction of the forecasting mistake is always identical, suggesting that the market is taking its cue about the future path of interest rates from the Fed’s dot plot.
The good news is that the Fed is able to anchor market expectations, and thereby reduce volatility in financial markets.
The bad news is that when the Fed’s forecast is wrong and the FOMC has to move from three cuts in 2024 to say, one cut, it will hurt Fed credibility.
The US economy’s lower interest-rate sensitivity, combined with strong structural and cyclical tailwinds to growth, brings us to the conclusion that the Fed will not cut interest rates in 2024.
Source: FOMC, Bloomberg, Apollo Chief Economist
