Weakening Profit Growth Could Squeeze Margins

As encouraging strong first quarter profit figures come in, investors should keep in mind that earnings of global companies in the S&P don’t necessarily reflect trends in the American economy, according to a recent Wall Street Journal article.

The article points out that, on a global basis, year-over-year first quarter results look strong, but underscores the fact that the domestic picture is “more challenging, with revenue climbing slowly and rising labor costs threatening to bite into the bottom line.” Economists are now estimating that GDP grew by a modest 1.2% in the first quarter of this year.

A vicious cycle can emerge, the article asserts, when companies try to preserve margins by suppressing hiring and spending, which ends up hurting demand and can “make the profit problem worse.” Relief could come if the president’s tax cut proposals get pushed through, since “margins would at least temporarily improve, forestalling the squeeze.”

The optimal situation for both the work force and investors, the article argues, might be for corporate management to allow margins to tighten somewhat. “But,” it concludes, “people don’t always do what’s good for them.”


profit chart