Will profits be lost?

Posted by: Paul Donovan

05 Apr 2019
  • As economists like to point out, equity analysts are not very important. Listed firms make up about a quarter of the big economies. Small businesses and government are three times as important. This means that equities and economies can go different ways. Wealth can move between listed firms and the rest of the economy.
  • Early last year, US profits after tax rose sharply as a share of the economy. The 2018 deficit-financed company tax cuts took money from future US taxpayers to give today's US company shareholders. Large firms were part of this process. This let equities outperform the economy
  • US fourth quarter 2018 data showed a small drop in the profit share of the economy. President Trump's trade tariffs hit US listed firms more than other parts of the economy. Trade tariffs are a tax on equities. Trade taxes took money from US firms and gave it to the US government.
  • The effects of the company tax cuts will fade from the second quarter of this year. Markets are hopeful that trade taxes will be reversed. This has not happened yet. Indeed, the US continues to increase taxes. This makes it unlikely that profits will outperform the economy this year.

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