It has been encouraging to see first-quarter corporate profits coming in much better than had been previously expected. Earnings estimates for the first quarter are now 10.6% ahead of where they were at the start of the quarter (though growth in the quarter itself is still expected to be 2.2% lower than fourth quarter 2020, but 25.5% higher than first quarter 2020). Furthermore, in contrast to the usual pattern of a slow descent for earnings estimates from analysts, S&P 500 earnings estimates for 2021 have been steadily improving, with growth for the calendar year now expected to be 27.2% (up from 23% just a few months ago). While the near-term earnings picture is important, for many of our longer-term investor clients, the bigger question revolves around the structural behavior of corporate profit margins.
In this Economics Weekly, we shift our focus to the longer-term earnings picture and whether there is reason to believe that the structurally higher profit margins over the last two decades may be about to change.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.