A Shocking Dip in Corporate Profits: What It Means for the Economy

This morning, the Bureau of Economic Analysis (BEA) delivered a startling report on the current state of American business. While the report included the Nation’s GDP data, a closer look at the details reveals an alarming trend in corporate profits for Q1 2024. Although this is a preliminary report, and a final revision is expected next month, the current figures provide crucial insight into the performance of Corporate America.

A Tale of Two Sectors

American businesses are operating in two starkly different worlds. On one hand, financial companies are thriving, with profits increasing by a substantial $73 billion for the quarter, buoyed by a booming bull market. On the other hand, non-financial profits have taken a nosedive, dropping by a staggering $114 billion. This nearly 5% decline in non-financial profits spells trouble for the broader economy.

The Importance of Corporate Profits

Corporate profits are a vital indicator of the stock market's direction. Rising profits generally drive bull markets, as investors flock to stocks with growing earnings and shy away from those with declining profits. Nvidia’s recent stock performance exemplifies this phenomenon, driven largely by its strong earnings and positive profit outlook.

Today’s report underscores the challenges non-financial companies face in maintaining profit growth. Companies further removed from the financial hub of Wall Street find it increasingly difficult to sustain their profits.

GDP Growth Revisions and Economic Slowdown

The Q1 2024 GDP report corroborates these findings. The second estimate of GDP growth was revised downward by 0.3%, bringing the growth rate to just 1.3%. This represents a sharp deceleration from the 60% higher growth rate in Q4 2023, indicating that the economy is slowing considerably.

This slowdown comes 24 months after the Federal Reserve began hiking interest rates in Q1 2022 to combat inflation. The impact of such monetary tightening typically lags by 18 to 30 months, suggesting that we are now feeling the full effect of these measures. Regardless of the Fed's actions this summer, we can expect continued economic deceleration, reflected in declining corporate profits.

Implications for the Stock Market and Politics

If non-financial corporate profits continue to decline, historical patterns suggest that the current bull market in equities may falter. A decrease in Wall Street profits could follow, potentially leading to a downturn later in the year.

The political ramifications are also significant. A slowing economy and a potentially declining stock market are unfavorable conditions for an incumbent during an election period. As voters weigh their options, economic performance will undoubtedly play a critical role in their decisions.

Conclusion

Today’s report delivers two significant and troubling revelations: a major drop in non-financial corporate profits and a further reduction in GDP growth estimates. As the economy teeters near stall speed, we must stay tuned for next month's update to understand the full implications. However, the signs point to a challenging period ahead for the American economy.