Corporate profits

Corporate profits relative to GDP

GDP from business profits

Citi Research

We have all seen this painting before. These are corporate profits as a percentage of GDP.

The implication is that record profit margins are an anomaly due to too few workers working too many hours for too little pay.

Stock market bears warn that margins are bound to return to a long-term average. And ultimately, this is also supposed to translate into a crash in earnings, which would cause stocks to fall.

However, stocks and are not the economy.

And Citi’s Tobias Levkovich challenges those who compare stock market metrics to US economic metrics.

Market capitalization

GDP measures also miss the growing impact of foreign income from non-US GDP sources, making this approach much less useful as well,” Levkovich wrote in his weekly note to clients. “Because corporate profits as a share of GDP are at a 65-year high, there is a legitimate view that margins are so stretched that they can only decline.”

[B]but that does not take into account earnings growth from S&P 500 constituents from international sources which may have been produced internationally and do not even enter into the calculation of US GDP“, he added. “Similarly, high margins also reflect sales outside of the US that were produced outside of the US, even though the profits accrue to US entities (which may not be repatriated and therefore tax rates are much lower ). By the way, the National Income Account profit margin data and GDP figures include private companies that are not represented in the S&P market capitalization.but this question is never addressed by the critics.”

Profit margin bulls recognize that margins are historically high, and most agree that there will be a comeback, especially if there is a



However, all margin bulls agree that margins are up secularly thanks to, among other things, increased overseas exposure.