Corporate profits reached yet another record high last quarter, according to a Bureau of Economic Analysis report released today. But perhaps more striking is that profits coming from abroad grew at about five times the pace as domestic profits did, at least in percentage terms. To some extent this reflects a longer-run trend. The rest of the world has generally accounted for a larger share of American companies’ profits over time (with some bigger spikes when the U.S. is in recession):
Maybe this is why corporate America appears relatively unfazed by lackluster output and jobs growth at home — because U.S. companies know their fates are less tied to the strength of the U.S. economy than they used to be. Some economists have also dismissed concerns about a stock market bubble for exactly this reason. As John Higgins, an economist at Capital Economics, wrote in a note to clients today:
To many, the S&P 500 is an accident waiting to happen because profit margins are “bound to collapse” from extremely stretched levels. We are not convinced. Admittedly, the index is likely to struggle to make further headway as the Fed tapers its asset purchases and if there is renewed turbulence in emerging markets. But profit margins are higher than their long-run average for a reason – the internationalisation of Corporate America.
The reach of Corporate America has become increasingly global. One important consequence has been a secular rise in profitability, not only at US multinational companies (MNCs) which dominate the major stock markets, but also at firms which operate solely within the US.