America Inc. margins are shrinking

America Inc. margins are shrinking

Earnings of the biggest firms have declined in the second quarter.

America Inc. has enjoyed an extraordinarily good run since the country rebounded from the global financial crisis of 2008-09. The economy has grown, while inflation has been low and interest rates rock-bottom. Despite unemployment hovering below 5%, wage pressures have been modest.

President Donald Trump’s tax reform cut the corporate tax rate from 35% to 21%. This and his deregulatory efforts have freed up capital. Companies have used the windfall to buy back shares—reducing the amount of stock and superficially boosting earnings per share. The S&P 500, Dow Jones Industrial Average and Nasdaq Composite, three leading share indices, hit record highs on July 15th. All told, annualized corporate profits exceeded $2 trillion last quarter, nearly double the level a decade ago.

Today, however, the mood in boardrooms is less ebullient. The latest survey by the Business Roundtable, a conclave of bosses, put confidence higher than the historical average and well above the level which would signal a recession. But it has slipped. The National Federation of Independent Business observes a similar decline in optimism among bosses of small and medium-size enterprises. Nearly four-fifths of S&P 500 firms that have issued guidance on financial performance for the latest quarter have indicated that earnings per share will fall year on year.

Analysts’ forecasts reflect these sentiments. Profits in six out of eleven big industries may have declined from April to June compared with a year earlier. FactSet, a research firm, estimates an average drop of 2.8% for S&P 500 earnings, on top of a 0.3% dip the quarter before.

Three reasons for the darkening outlook are as follows:

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2019-07-30T05:11:43+00:00

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Oso Oseguera
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