Chart of the Week: Profits at a Record

Chart of the Week: Profits at a Record

While Federal Reserve Chair Jerome Powell stole the show in Jackson Hole last week and had onlookers reevaluating the probability of a recession ahead, the most recent data on corporate profits flew under the radar.

In fact, U.S. companies were more profitable than ever in the second quarter, according to the Bureau of Economic Analysis. But it’s not just the absolute level of money coming in that matters; it’s also what companies keep after taxes and expenses—aka “profit margins.” Through June, profit margins improved compared to the first three months of the year, and they remain near record levels.

This tells us two things. First, if we are in fact heading for a recession, companies are starting from a position of strength. Second, so far, major U.S. businesses have been able to pass higher input costs on to customers in the form of higher prices. While that’s not great for consumers, it’s a positive for investors. We’ll be keeping an eye on profit margins in the quarters ahead, as we don’t expect companies will be able to keep raising prices forever. That said, if inflation is in retreat, input costs should also abate a bit.

Note: Chart shows U.S. corporate profit margins on a quarterly basis from March 1947 through June 2022. Profit margins were calculated by dividing Corporate Profits After Tax with Inventory and Capital Consumption Adjustments by Nominal Gross Domestic Product. Source: Bureau of Economic Analysis.

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Chart of the WeekinflationJeff DeMaso