US: Corporate profits reach a historic high in Q2  - Wells Fargo

Today’s data showed a positive revision to US Q2 GDP data. Analysts at Wells Fargo, point out that corporate profits reached a historic high in the second quarter, supported by strength in real final sales and consumer spending. 

Key Quotes: 

“Growing at a slightly faster pace than initially reported, real GDP rose at an annualized rate of 4.2 percent in Q2. As initially reported, consumer spending, business fixed investment and government spending each rose at a solid pace.”

“Business fixed investment, revised up 1.2 percentage points, led much of the upward revision, with intellectual property products growing 11.0 percent over the quarter. Similarly, a significant downward revision to import growth caused net exports to add a bit more to overall GDP growth.” 

“With the second estimate of GDP we received our first look at corporate profit growth in the second quarter. Pre-tax profits grew $72.4 billion over the quarter, nudging the overall pre-tax profit level up to $2.2 trillion, a record high for the series. However, after-tax profits rose only $47.3 billion, compared to the near $150 billion surge in the first quarter.”

“We look for corporate profits to continue to rise in the medium term, due to elevated levels of real final sales and business fixed investment. However, if the strength in equipment spending and intellectual property continues to only translate to modest improvements in productivity, it will likely exert a headwind to corporate profit growth in the future.”

“As the economic cycle continues to mature, increasing labor costs will squeeze corporate profit margins. Rising inflation also has the potential to limit real income gains, while higher interest rates may weigh on consumer spending–which would dampen real final sales, all else equal.”