Covid turned out to be a giant goldmine for Corporate America
The flare-up of inflation that followed the pandemic, combined with flush consumers ready to spend, ushered in an new era of profitability even more massive than previously estimated.
The robust, stimmy-assisted exit from a pandemic-stricken economy has been even better for Corporate America than we thought.
The US Bureau of Economic Analysis revised sharply higher its previous estimate of last year’s corporate profits, boosting its most comprehensive figure on collective bottom line by $288.5 billion, or nearly 9%.
The numbers were revised based on hard data government statisticians received from the Internal Revenue Service – something of a gold standard, as it represents the actual profits corporations reported on their tax filings.
Lest you think this is simple a story of inflation alone, take a look at corporate profit margins. The pricing power that coincided with the post-pandemic inflation, as well as consumers who had benefitted from the government’s income support measures, have driven corporate bottom lines skyward.
For the record, these government readings on profitability are for the economy at large, not just the largest publicly traded corporations that dominate the US stock markets.
But one way to make sense of the historically high valuation of the US markets — the S&P is currently trading at a multiple of almost 22 times expected earnings over the next 12 months — is that it has something to do with margins.
Investors typically will be more willing to pay a premium for stocks that have the kind of high and enduring profit margins that Corporate America is generating at the moment. Whether that’s still a good bet to make is a question that the market will answer over time.
