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August 31, 2018

Record US corporate earnings: A good criteria for fair valuation of shares

Record US corporate earnings: A good criteria for fair valuation of shares

United States corporations have gotten the record income ever. What’s the catch?

One of the most important factor, that affects US stock markets, has shown marked growth and has reached new maxima. The quarter net profit of the American companies has set a new absolute record.

From March till June legal entities of the USA have earned 1,97 trillion dollars. They have never gotten so much money. The previous record has been set in the third quarter of 2014, when the profit of the companies reached 1,92 trillion dollars. At the same time, these results are a little bit misleading, because of the tax reform, that was implemented in the end of 2017.

Thanks to decrease in fiscal payments the companies managed to get the record profit. In this case, the size of income before taxes would be more informative. In the second quarter of 2018 American organization have earned 2,2 trillion dollars, and the previous maxima was 2,32 trillion dollars.

 

corporate profits

 

The tax reform gave time to shareholders and investors and speed up further growth of shares. But the growth of income wasn’t matched by fundamental changes in companies’ business, it means that without tax burden relieve it was impossible to reach present results.

In our opinion, US government wants to prop up growth of stock market, despite the fact that the marked is a free space without government intervention. But this leads to somewhat overpriced valuation of shares, in other words, inflates the stock market bubble. If American companies’ income do not come to really growth, the full-blown correction will start.

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