US | Stars are aligning for corporate profits

For US companies, a post-pandemic boom in consumer demand will lead to faster growth in revenue than costs, setting the stage for a 15% rise in corporate profits this year – the fastest in over a decade. This will boost hiring and capex growth, and provide a supportive environment for risk assets.

As the rollout of Covid vaccines accelerates, generous fiscal transfers from the American Rescue Plan and firming employment will help unleash pent-up demand, fueling a summer boom in consumption and economic activity. We expect a 10% rebound in nominal GDP growth – a proxy for companies’ sales – in 2021 to translate into double-digit revenue growth.

Recovering overseas economies and a modestly softer dollar will also bolster foreign earnings, which account for 20% of US companies’ overall profits. Global growth is set to accelerate to 6.0% this year – the fastest rate since 1978.

In the early phase of an expansion, plunging unit labor costs and strong productivity gains have historically led to a surge in corporate profit margins, as the labor market lags the recovery in output. However, the prospect of tighter labor market conditions and rising input costs this year, and the fact that margins have remained historically high, point to limited upside.

Still, faster productivity growth and a modest recovery in pricing power should mitigate the bottom-line pressure from rising labor and input costs. Low interest rates, ample liquidity, and aggressive cost-cutting have also allowed businesses to strengthen their balance sheet positions. This will make a rise in expenses more manageable, adding further support to profit growth this year.

Topics: Coronavirus