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Corporate Profits Do Not Equate To A Recovery

14 July 2010 One Comment

Earnings season is underway and many profit reports so far are good for major corporations such as Alcoa and Intel.  The thing is that this is nothing new.  Corporate profits have seen upside “surprises” now for several quarters.  Beating estimates on the bottom line now has been easy as activity picks up from the bottom in sentiment back in early 2009.

Soon, however, the easy comps with regards to terrible quarters at the depths of sentiment will be over.  The easy beats will not continue. 

The problem is that an increase in corporate profits have not meant a real recovery.  For over a year now, I’ve been talking about the two economies going on.  One is the economy of the major corporations who have access to easy money, global markets and have been able to shed massive costs (via layoffs).  The other is the real economy of small business and the average Joe which is still struggling intensely.  Without the real economy recovering, true recovery will not materialize.

Additionally, we also noted recently that the buildup in cash in corporations due to the increased profitability has not led to investment in new growth areas or job creation. Instead, an increase in stock buybacks has been the trend lately.  While this is good for investors, this doesn’t do much for an actual economic rebound.

With this said, corporate profits are a good thing.  They’re important for our economy, but with the changes that have occurred, unfortunately, they do not guarantee a recovery.  The large multi-nationals can be profitable, but it doesn’t mean that unemployment improves or the financial situation improves for the average Joe.  Furthermore, the Dow can stay above 10,000 and it’s doesn’t necessarily equate to an improvement in the real economy.

Take earnings season with a grain of salt.

One Comment »

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