Research.LeutholdGroup

In prior publications we’ve written about corporate leverage, which has risen to an alarming level, and we’re concerned that this could be a trigger for the next market downturn.

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Corporate profits were outstanding last year, but even the benefit of a 40% cut in the top income-tax rate wasn’t enough to lift the net profit margin back to the all-time high of 10.6% established in early 2012. Still, the latest 10.0% figure is more than a percentage point above the 2007 cycle high and about two points better than any other cycle high.

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A massive drop in corporate tax payments lifted the third quarter NIPA profit margin back to the 10% level for the first time four years. But while we try not to always view the glass as half empty, we find it troubling that margins remain well-below their 2012 highs (10.6%) in spite of this one-time windfall.

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A late March issue of The Economist proclaimed “profits are too high” and “America needs a giant dose of competition.”  Funny. NIPA Corporate Profits figures released that week show The Economist’s plea for lower profits had already been fulfilled—and not just in the latest quarter.

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In Q2, NIPA’s EBIT margin fell to a new four-year low, over one point below the early 2012 cycle peak.

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Earnings growth over the next few years will—in the  best case—be forced down to the rate of top-line growth (nominal GDP).

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The margin expansion story of the last 20 years is a financial one, not an operating one.

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The celebrated gains in corporate profitability over the past decade and a half are attributable primarily to proportional declines in “below the line” items like interest expense and corporate taxes.

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