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The Topic: It’s Inflation, NOT Deflation

What is Really Happening to Corporate Profits?

Both the S&P 500 and the NASDAQ rose to all-time record highs today; nominal highs, of course. The Dow Jones didn’t quite make it to a new high, it did close better than 50 points higher – 27,192.45, but probably the most interesting thing about the record high, is what’s actually happening to corporate profits. I’m talking about operating profits, which are profits before you subtract interest and taxes. I’m looking at some new statistics that came out today. There were some revisions that came out from the government; some of them on the GDP, which I will get to a bit later in the podcast.

Corporate Operating Profits Moved Sideways Since 2014

Just looking at corporate operating profits, it turns out that operating profits actually peaked in the third quarter of 2014. That is while Obama was still President, a few years before Trump was President. So corporate profits – operating profits peaked in Q3 of 2014. And they basically have been going sideways ever since, although they have been dipping recently. If you take a look at the last quarter, operating profits are now the lowest they’ve been since 2011.

Profits Have Gone up – but Not Operating Profits

Now, the Dow Jones finished 2011 at about 12,000 – 12,200, I think was the end print. Well, we’ve more than doubled since then, but operating profits haven’t gone anywhere. How are you doubling stock values when the profits are staying the same? Now, of course it’s not the profits – profits have gone up – but not operating profits. But operating profits are really more important if you want to look at what’s going on in the companies in these averages. Operating profits is how much money the companies make from operating their businesses.

Tax Cuts Boosted the Stock Market

So, actual profits have risen even though operating profits have not. Why is that? One: we got the big tax cuts. Corporate tax rates went way down so that enabled after tax earnings to rise. So that provided a boost to the U.S. stock market. But these corporate tax cuts are temporary. They are not permanent; corporate taxes are going to be raised. Especially if I’m right about Trump being a 1-termer; the Democrat who succeeds Trump is going to raise corporate taxes.