Profit Party in the Far East
American GDP jumped by an impressive 4.1% in the second quarter, up from 2.2% in Q1 and the fastest annual rate in four years.
But the bigger story (and long-term driver of stock prices) is the surge in corporate profits.
As earnings season wraps up, 80% of the companies in the S&P 500 have already reported their second-quarter results and, according to Thomson Reuters, American business is booming.
Source: New York Times, FactSet
On a year-over-year basis, profits at S&P 500 companies are up 23.5%!
The prosperity is spread across all sectors and BAML (Bank of America Merrill Lynch) says that profits are 3% above Wall Street’s expectations.
If that 20%-plus number holds (and I’m confident it will), this will be the second quarter in a row of 20%-plus earnings increases for Corporate America.
That is huge!
There are plenty of reasons for robust profit growth, but there is no question that Trump’s tax cuts, which chopped the U.S. corporate tax rate from 35% to 21%, are driving the bulk of the profit growth.
In fact, roughly half of the profit increase is coming from the Trump tax cuts, according to Merrill Lynch.
As beneficial as the corporate tax cuts are, they are not responsible for the 9.2% year-over-year increase in top-line sales for the S&P 500 companies.
Revenue growth is simply a byproduct of a very healthy, growing economy.
And stocks are no longer expensive. The S&P 500 is selling at 16 times earnings, which is the average for the last 25 years.
Those are impressive numbers. But we live in a small world and the U.S. isn’t the only place where corporate profits are soaring.
In fact, corporate profits are growing at TWICE that pace in the Land of the Rising Sun: Japan.
And get this. Corporate profits are up an average of 55% on a year-over-year basis in Japan.
Even more impressive is one in four Japanese companies has reported all-time record profits in the second quarter.
There’s something seriously good going on in Japan.
Of course, nothing is guaranteed in the investment business, but if you’re looking for exposure to the best economies and the stocks that fuel it, consider parking some funds in these strong performing Japanese companies.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch