Record-High Profits May Not Last

Corporate Profits Graph

One factor that has buoyed U.S. stocks in recent years is high profit margins. Corporate profits as percent of the country’s total output reached a record level of 10.8% in the first quarter of 2012, and they’ve gone even higher since then. In the third quarter of 2013 (the last period for which numbers are available) they reached a new record of 11%.

Part of the reason for record-high profitability may be the weak jobs market. Higher levels of unemployment since the financial crisis have resulted in less pressure on companies to increase their employees’ wages, leading to lower costs and higher profits.

Some analysts suggest that record-setting profitability is a bearish sign for the stock market going forward, since profits presumably have nowhere to go but down (the long-term average for corporate profits as a percent of the country’s total output is around 6.5%).

This decline may begin as the unemployment rate declines toward more normal levels (it’s now 6.7%, down from a high of 10% in late 2009). That would serve as a headwind for stocks, offsetting some of the benefit from stronger economic growth.