We Think This Is Very Negative Global Risk Especially For Equities

WHY CORPORATE PROFITS MAY BE WEAKER THAN THEY SEEM

via Justin Lahart

According to companies, profits 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, released alongside gross-domestic-product data 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 companies’ overseas operations. The government figures include all U.S. companies, not just big public ones.

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