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First quarter earnings set to soar

APR. 13, 2021

Graph depicting the average annual changes in corporate profits by the annual change in GDP

Source: Bureau of Economic Analysis

quarter earnings season gets underway this week with the big banks batting leadoff again and very likely setting a positive tone thanks to the rapidly recovering economy and steepening yield curve (it is a safe bet that JPM CEO Jamie Dimon already had a very good sense of the figures his firm will report on Wednesday when he wrote last week that the “consumer balance sheet is in excellent shape” and that the coming economic boom “could easily run into 2023”).

Of course, the increasingly solid economic turnaround should be reflected in the earnings releases more broadly in thuae weeks ahead as already hinted by the unusually positive preannouncement season. And with reopenings, the surging labor market, and stimulus set to push GDP sharply higher through at least the end of the year, it is to be expected that earnings growth will remain robust well beyond Q1. Corporate profits tend to boom in the early stages of even tepid economic recoveries – note the outsized increases in 2002 and 2010, for example – and, thanks to operating leverage, they have expanded disproportionately when economic growth has been especially strong. Every one percentage point of GDP growth has historically produced more than two percentage points of corporate profit growth on balance, with the effects more pronounced at faster paces of expansion. This could well be a massive year for earnings, one that should help to alleviate at least some of the widespread valuation concerns that have prevailed almost from the outset of the cycle..

Daily Trivia

The economic puzzle involving one producer, one consumer, and two goods is named for what seminal literary character?

Previous Question

What is the world’s only central bank not named for a country or region?

Answer:

Federal Reserve

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