The Economy

Corporate Profits Climb 0.5% in 4th Quarter

The gain was the third in four quarters but some analysts are cutting back their forecasts for S&P 500 earnings for the first quarter.
Matthew HellerMarch 31, 2017
Corporate Profits Climb 0.5% in 4th Quarter

U.S. corporate profits rose for the third time in four quarters but some analysts are paring back their forecasts for the first quarter of this year amid some doubt about the positive impact of President Trump’s fiscal policies.

The Commerce Department said adjusted-pretax profits rose at a 0.5% annual pace in the fourth quarter after a nearly 6% gain in the third quarter.

As MarketWatch reports, profits have climbed at a 9.3% rate over the past year, the fastest gain since 2012, as “the world economy improved, commodity prices stabilized, the dollar fell in value and companies took extra step to reduce costs.”

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By contrast, corporate profits tumbled 3.1% in 2015 to mark the first decline since the 2007-09 recession. “Higher profits are a good sign for the economy, suggesting that businesses can do more hiring and spend,” MarketWatch noted.

But The Financial Times reported that analysts are reducing their outlook for companies listed on the S&P 500 index, forecasting profits will increase 9% in the first quarter, which is up from 4.9% in the fourth quarter of 2016 but lower than the 12.3% gain analysts were expecting at the start of 2017.

Nicholas Colas, chief market strategist at Convergex, said it was normal for analysts to “start high with [earnings] estimates and move lower,” but that shouldn’t have happened this time around with President Trump promoting pro-business policies.

“You wouldn’t know that there was an agenda in place to lower corporate taxes and raise infrastructure spending. That is invisible in the numbers,” he told the FT.

According to Russ Koesterich, a portfolio manager at BlackRock, investors may have gotten overly optimistic about Trump and his policies.

“Beyond earnings, another cause for caution is that while data on the U.S. economy have been ‘solid’ overall, there are indications that growth may not ‘accelerate as quickly as people thought at the beginning of the year,” the FT said, quoting Koesterich.