Why Are Corporate Profits at All-time Highs? – Alex Green
Alexander Green, a Senior Editor and Analyst at the Oxford Club, and author of several national best-sellers about investing, believes corporate profits and corporate profit margins could keep growing. These companies are making real money for shareholders, he says, and could keep getting better. In fact, he is bullish on the prospects for the economy in the U.S. and throughout the world.
I recently called Alex at his Florida office.
Why should investors be bullish on the economy?
“Well, we all know the negatives facing the economy,” he began. “The recovery has been slow; the dollar has been weak; banks are not lending; companies are not hiring; and when it comes to unemployment, many people have given up on finding a job.”
“But investors need to weigh the positives as well,” he argues. “Zero-interest rates and low inflation are rocket-fuel for stocks and bonds. The real-estate market is recovering. We also have an energy renaissance in the United Stated, fueled by new technology – horizontal drilling and fracking.”
“As a matter of fact, we surpassed Russia last year as the biggest oil and gas producer in the world. We have huge new markets for natural gas, and low prices have been good for manufacturers.”
“Meanwhile, household net worth is at all-time highs, at more than 80 trillion dollars in the United States. We are seeing a period of record corporate profits, record profit margins, and record cash on corporate balance sheets.”
“So investors should consider the record financial strength of U.S. corporations, which are performing unequivocally well. And that money makes shareholders richer too.”
Can this go on much longer? Or will the low-interest rate environment break down at some point?
“Company profits are on steroids because of zero-interest rate policies – but they are also making real improvements in productivity. They are making real investments and generating returns. The Fed’s accommodative policy is not the only reason for rising corporate profits.”
“U.S. corporations are making big gains in productivity, which improve their bottom lines. Technology and outsourcing has allowed them to cut back on expensive labor.”
“In fact, the current environment shows that companies can generate high profit margins and positive share price growth in the absence of a broad economic boom. This could go on for a long time.”
“There are massive new markets opening up overseas. Emerging markets are still growing rapidly, and increasing the demand for material goods, which U.S. corporations are able to provide.”
“Cheap and plentiful natural gas being produced in North America provides a boost to energy consumers. Utilities are switching from coal to natural gas, improving their economics.”
“The Fed’s easy money has helped corporate profits as well, by allowing them to refinance debt at lower interest rates. QE has driven their share prices higher by keeping bond yields low. But corporations have also been able to shed workers and reach new overseas markets to improve their earnings. So cheap money alone is not driving share prices higher.”
But low interest rates, low employment numbers, and stagnant inflation point to poor economic conditions. What does that mean for the ‘recovery’? Is the economy really growing?
“Well, stock prices will not necessarily keep going up. We are five years into a bull market in the broad U.S. stock markets, which is a long time. As a result, stocks could begin to decline soon.”
“But investors should remember that U.S. corporations, far from suffering from a downturn, are more profitable than ever. They are the big winners in the aftermath of the recession, unlike many predicted.”
Alexander Green is the Chief Investment Strategist of The Oxford Club, the Senior Editor of The Oxford Communiqué, and Editor of The Momentum Alert, The Insider Alert and The True Value Alert. Alex’s Oxford Communiqué is ranked among the top 10 investment letters in the nation by the independent Hulbert Financial Digest.
A 25-year Wall Street veteran, Alex has been profiled by The Wall Street Journal, Bloomberg BusinessWeek, Forbes and other media outlets.
Alex is also the author of three national best-sellers. His works include The Gone Fishin' Portfolio; The Secret of Shelter Island; Beyond Wealth: The Road Map to a Rich Life; The Secret of Shelter Island: Money and What Matters; and An Embarrassment of Riches.
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