Bullish, for now. That’s the takeaway from corporate America’s second-quarter earnings.
Pretax profits at U.S. companies climbed 7.7 percent from a year earlier, the most since 2014 and the seventh consecutive gain, according to Commerce Department data released Wednesday. Throw in the boost from lower taxes that went into effect this year under the Trump administration, and firms have plenty of wherewithal for more investment and hiring.
The expanding coffers are reflected in a stock market hitting record highs. Businesses are also putting the cash to use: nonresidential fixed investment, which includes spending on equipment, structures and intellectual property, increased last quarter by 8.5 percent, revised from a previously estimated 7.3 percent, the data showed. Spending on business equipment rose an upwardly revised 4.4 percent.
Firms are also on a stock-buyback spree following the tax windfall, with Goldman Sachs Group Inc. estimating that companies in the S&P 500 index will authorize $1 trillion in stock buybacks in 2018, a record and a 46 percent jump from last year.
The big question is whether companies continue to be as enthusiastic about investing and employment, given the headwinds from a trade war and a fading benefit from the tax stimulus. The latest figures indicate that the boost from tax cuts “has already hit the corporate bottom line,” according to Chris Rupkey, chief financial economist at MUFG Union Bank in New York.
After-tax corporate profits grew 2.4 percent last quarter from the prior period, down from an 8.2 percent jump at the start of 2018, according to the Commerce Department’s first estimate of second-quarter profits.
“We just had one of the biggest giveaways in corporate and individual tax cuts in modern economic history, and it would be foolish to ignore these as the primary driver of economic growth this year,” Rupkey wrote in a note. “2019 is a different story.”
The profit figures were part of the government report on the revised tally for gross domestic product, which showed the economy grew at a 4.2 percent pace last quarter, the most since 2014 and up slightly from an initially estimated 4.1 percent.
It also remains to be seen whether employers’ fatter bottom lines will finally translate into more generous hikes in workers’ paychecks, which have been disappointing throughout this expansion even as the labor market has tightened. Wages and salaries grew 4.4 percent last quarter following a 5.8 percent gain from January through March.
