Profits are the mother’s milk of stocks and the economy.
And they have soared in recent years, fueling the stock market’s rise.
Check out the latest Treasury Department reports. What has been remarkable is the rise in NIPA corporate profits, the most accurate profits measure, which are based on IRS tax filings. Obviously, corporate execs have no interest in artificially pumping up their profits to the IRS. Moreover, NIPA profits are based on current production, so expenses (like pensions and options) are scored when they occur.
NIPA profits have increased 131 percent from the trough, much more than the broad market indexes (the S&P 500 is up 85 percent and the Wilshire 5000 is up 97 percent). As a share of GDP, profits are at record levels; pre-tax profits are 12.4 percent (the highest since 1951), while after-tax profits are 8.7 percent (a post-WW II record).
Profits have been rising at a double-digit clip for over three years now.
This is profit season for the fourth quarter and some analysts think there’ll be a slowdown to single digits. Maybe so, but the Treasury Department reports that for the first three months of fiscal 2007 through December, corporate tax collections rose 22 percent—a pretty amazing number.
In addition, the December 15th tax payment date brought the largest single day corporate tax ever—receipts totaled $73 billion.
So, apart from the overall good news that revenues are rising (at lower tax rates) and the deficit is falling, the Treasury’s numbers are telling us that there might be yet another upside, positive surprise on corporate earnings.
Profits may be a four-letter word to some in Washington, but they are manna from heaven on Wall Street.