We Think This Is Very Negative Global Risk Especially For Equities

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WHY CORPORATE PROFITS MAY BE WEAKER THAN THEY SEEM

viaĀ Justin Lahart

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According to companies, profitsĀ were great in the first quarter. According to government statistics, not so much.

Profits for companies in the S&P 500 grew a stunning 26.3% in the first quarter compared to a year earlier, according to Thomson Reuters I/B/E/S. That measure, which is used by investors, benefited from a strong global economy, a weakening dollar and, most of all, a cut in the corporate tax rate to 21% from 35%.

But a Commerce Department measure of corporate profits, releasedĀ alongside gross-domestic-product dataĀ on Wednesday, showed that profits rose by just 0.1% in the first quarter from a year ago. Take away the tax-cut benefit, and the numbers were worse: Before accounting for the benefits of the tax cut, profits were down by 6%. These numbers are the only ones that show the impact of the tax cut, which created a divergence of the pre- and post-tax numbers.

There are a number of important distinctions between the profits S&P 500 companies post and the government profit figures. Government figures largely exclude companiesā€™ overseas operations. The government figures include all U.S. companies, not just big public ones.

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