The most recent edition of Societe Generale’s investment newsletter Global Strategy Weekly is titled “Smoke and mirrors stop us seeing a slump in US profits.” In the report, Societe Generale lead analyst Albert Edwards highlights that the recent slump in economic profits in the U.S. could be auguring the end of the current economic cycle.
Edwards explains his perspective in the overview of the report. “During the excitement of the downward revision of Q1 US GDP from +0.1% to -1.0% investors seem not to have noticed a $213bn, 10% annualized slump in the profits from current production…or economic profits. We show below the stark difference between the BEA’s calculation for post-tax headline profits (up 5.3% yoy) and economic profits (down 6.8% yoy). In this note we try to explain what is happening and why the 10% annual slump in economic profits really does matter.”
Headline profits artificially inflated
The gist of Edwards’ argument is that corporate profits are not as rosy as they look, mainly because the 5.3% y-o-y headline corporate profit rate is artificially inflated due to the impact of expiring tax credits. “So headline reported profits are currently artificially inflated upwards to show a roughly 5% yoy increase, which is incidentally the same pace that the MSCI trailing reported stock market profits are rising by — both are misleading investors as to the underlying strength of profits.”
Economic profits: Margin cycle turning over
According to Edwards, the key takeaway here is that the corporate profit margin cycle has finally turned over, meaning profits are heading down. He offers a chart to Illustrate his argument.
Chinese renminbi devaluation will also hurt U.S. profits
According to the Societe Generale report, the ongoing devaluation of the renminbi by the Chinese government is also likely to have a negative impact on U.S. corporate profits. Edwards explains his argument in graphic terms below. “We have also highlighted that China is set to export its deflation to the west via renminbi devaluation, likely crushing US and eurozone profits in the process.”