Corporate America is in trouble. Latest figures from the Federal Reserve show that non-financial companies’ pre-tax profit rate in the first quarter fell to its lowest level since the financial crisis.
This isn’t merely due to the lockdown depressing demand. Even before the pandemic began the profit rate was trending down. In fact, there are two distinct downtrends. One is a short-term one: the profit rate fell between 2012 and 2019 despite an economic upturn. The other is a longer-term one: profits have recently been well below their average rate in the 1950s and 1960s.
You might thnk this grim picture is at odds with the S&P 500, which has more than doubled since 2012. But there isn’t really a contradiction. For one thing, the S&P 500 is dominated by a few huge companies: just five (Apple, Alphabet, Amazon, Facebook and Microsoft) account for over a fifth of its market capitalisation. And for another, the vast majority of US companies are not listed – and the unlisted ones tend to be smaller and less profitable. The stock market is not corporate America.