Tracking higher
It’s official. According to the US National Bureau of Economic Research, the Great Recession that began in 2008 ended in June 2009. This declaration is more than just a formality, as it also sets a marker for the start of the recovery.
Surprisingly for many, during the first year of recovery through to June 2010, corporate operating profits were exceptionally high even though economic recovery was relatively weak by historical standards.
The operating profits of US companies jumped by almost 40 per cent during this period. This growth matches the gain in the 1983 recovery and just falls short of the 1975 recovery, which was the biggest revival of corporate earnings after any recession in the last 50 years (see figure 1).
In contrast to the recent recovery, the earnings recoveries of 1983 and 1975 were driven by extremely high economic growth averaging around 6.3 per cent. This is more than double the 3 per cent gain we experienced this past year.
What’s driving profit gains?
The strong earnings growth in US companies is due to rising sales growth as well as cost cutting implemented during the GFC period.
In the year to date, revenue growth of US S&P50 companies grew by 9.7 per cent. Excluding financials, this figure increases to 11.8 per cent.
Interestingly, overseas branches of US firms now account from around 35 per cent of overall US corporate profits. This is about 10 per cent higher than a decade ago, showing that it is companies not ‘postcodes’ that are generating returns.
Figure 1: US corporate operating profits during first year of economic recovery
Source: AllianceBernstein, Bureau of Economic Analysis and Haver Analytics
What this means for investors
Despite the strong growth in US corporate earnings, analysts have downgraded their estimates for 2011 forecasts. However, history shows that analysts typically start with more negative forecasts and upgrade closer to reporting season.
The corporate sector is arguably the strongest feature of the US economy and this is good news for investors in this market. US corporate companies hold around $US1.8 trillion in cash. This means companies have the ability to reinvest or return an increasing amount of capital to shareholders either via dividends or buybacks.
