U.S. Corporate Profits Still Have Considerable Capacity

Could a period of aggregate profit revival elongate the bull market as leadership shifts from technology and growth towards value and small caps?

Despite the U.S. stock market currently being at a record high, profit capacity among U.S. corporations does not yet appear maxed out. Indeed, as demonstrated in chart 1, U.S. corporate profits have been persistently below their post-war trendline average for the last 10-years – the longest consecutive period in post-war history!

By the end of the 1990s stock market run and the bull market leading up to the Great Financial Crisis of 2008-09, “both valuations and profits” were above average. During the last decade, however, the U.S. stock market has delivered solid returns without robust profit growth. Despite relatively high current valuations, could the contemporary bull market continue delivering satisfying results should U.S. corporations finally enjoy a period of above-average, broad-based profitability growth? And if the primary force driving this bull market shifts from valuation to profitability, what are the implications for potential total returns and its leadership?