Market Analysis

Quick Hit: ‘Corporate Profits Recession’ and Stocks—There Is No ‘There!’ There

It isn't unusual for corporate profits to occasionally show a negative blip in a bull market.

In Friday's third revision to Q4 US GDP growth, one thing that seemed to catch a few eyeballs was a drop in US Corporate Profits[i], which some hyperbolically labeled "the worst news." Others claim a "profit recession"-whatever that means-looms. But here is the thing: A down quarter for corporate profits is not unusual amid a bull market. Here are two charts to illustrate the point. The first shows the Bureau of Economic Analysis' measure of corporate profits excluding depreciation. The second includes depreciation. The gray bars indicate bear markets and the blue dots denote a negative quarter of profits in a bull market. As you can see, such dips aren't exactly rare and occur at random points throughout a bull market and expansion.

Exhibit 1: US Corporate Profits After Tax Without Inventory Valuation and Capital Cost Adjustment

Source: US Bureau of Economic Analysis, Q1 1980 - Q4 2014. Bear market dates are 11/28/1980 - 8/12/1982; 8/25/1987 - 12/4/1987; 7/16/1990 - 10/11/1990; 3/24/2000 - 10/9/2002; and 10/9/2007 - 3/9/2009.

Exhibit 2: US Corporate Profits After Tax With Inventory Valuation and Capital Cost Adjustment

Source: US Bureau of Economic Analysis, Q1 1980 - Q4 2014. Bear market dates are 11/28/1980 - 8/12/1982; 8/25/1987 - 12/4/1987; 7/16/1990 - 10/11/1990; 3/24/2000 - 10/9/2002; and 10/9/2007 - 3/9/2009.

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[i]Note: This is the Bureau of Economic Analysis's measure, which is different than public company earnings.

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