The stock market rally should not be derailed by Q317 corporate profits, beginning to be reported in a few weeks. The macro evidence suggests another positive quarter, possibly stronger than the 6.0% consensus expectation. To be sure, less favorable base effects could hold down the y/y gain to single digits in Q317, as the strength of profits in Q316 makes for a difficult y/y comparison. A single-digit gain would follow the double-digit pace in both Q117 and Q217, 11.4% and 10.8%, respectively -- the first double-digit corporate profit gain in two consecutive quarters since 2011.
The biggest macro drivers of Q317 corporate profits relate to earnings abroad. Besides economic growth strengthening in Europe and elsewhere, the weaker dollar makes profits earned there worth more in terms of dollars. US Real GDP growth also held up at a good pace on a y/y basis, even though both Fed models have it slowing on a q/q basis (Atlanta Fed model projects 2.2%, NY Fed Model 1.6%, versus 3.1% in Q217).
The macro drags are a slowdown in oil prices on a y/y basis and some squeezing of margins (as prices did not rise as fast as wages -- although the latter did not accelerate).
Markit
Eurozone Real GDP Oil Prices Trade-Weighted
Dollar AHE Core CPI PMI
[ y/y percent
change ] (level)
Q316 1.5 -3.4 2.2 2.6 2.2
Q416 1.8 +16.4 3.9 2.7 2.2
Q117 2.0 +65.3 2.3 2.7 2.2 55.6
Q217 2.2 +13.1 3.1 2.5 1.8 56.8
Q317 2.1-2.2 +6.0 -1.9 2.5 1.7 57.4
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