The writer is a financial journalist and author of ‘The Economic Consequences of Mr Trump’Investment analysts are as heady as a schoolboy who has just experienced his first kiss. They are so optimistic that they are upgrading their profit forecasts by record amounts. According to Andrew Lapthorne at Société Générale, the 12-month forward earnings forecast for companies in the MSCI AC World index has been upgraded by $1.2tn in the past year, or 30 per cent. It is not just about technology companies; the high oil price means the energy sector has also seen big upgrades.
This optimism is part of a longer-term trend. Figures from the Federal Reserve Bank of St Louis show that US corporate profits are close to a record high as a percentage of GDP. Analysis by the St Louis Fed shows that this surge began around the start of the pandemic and was driven in part by a decline in net borrowing costs as interest rates declined. There was a stark divide at the sectoral level. The profit share of GDP of the finance sector was stable but the profit share of domestic non-financial industries surged from 8.1 per cent of national income over the 2010-19 period to 11.2 per cent in the last quarter of 2024.
All this helps to explain why the stock market has been so resilient in the face of conflict in the Middle East, the surge in oil prices and the US administration’s erratic policy agenda on trade. But the profits surge also points to other economic developments that may not be so welcome in the long term, either for the current US government or for investors.