U.S. markets face profit boom trade-offs

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U.S. markets profit trade-offs

Highlights

Analysts upgraded MSCI AC World index 12-month forward earnings forecasts by $1.2tn, up 30% over the past year, driven by broad-based profit strength and high oil prices.
U.S. corporate profits as a share of GDP rose from 8.1% in 2010-19 to 11.2% in Q4 2024, supported by large fiscal deficits and a sharp drop in personal savings.
The U.S. budget deficit stands at 5.8% of GDP for 2024 while falling personal savings and low consumer confidence signal sustainability risks for both profits and market valuations.

Profit growth drivers and market resilience

As reported by Financial Times, analysts are lifting earnings expectations at a record pace as global companies benefit from broad-based profit strength rather than a narrow technology rally alone. Andrew Lapthorne of Société Générale says the 12-month forward earnings forecast for companies in the MSCI AC World index has been upgraded by $1.2tn over the past year, a rise of 30%, while high oil prices are also boosting the energy sector.

That optimism fits a longer trend in which U.S. corporate profits are close to a record high as a share of GDP. Federal Reserve Bank of St Louis figures show the surge begins around the start of the pandemic, helped in part by lower net borrowing costs as interest rates fall, while the profit share of domestic non-financial industries rises from 8.1% of national income in 2010-19 to 11.2% in the last quarter of 2024.

The strength in profits helps explain why stock markets remain resilient even as conflict in the Middle East, higher oil prices and shifting U.S. trade policy unsettle the broader outlook. But the same trend also points to imbalances that could become harder to sustain over time.

Fiscal and consumer strains cloud outlook

An alternative reading of the profit surge comes from the Kalecki-Levy equation, which links corporate surpluses to changes elsewhere in the economy, especially government budget deficits and household saving patterns. Under that framework, large fiscal support and lower personal savings can both feed corporate revenues and profits.

Both forces have been at work since the pandemic. The U.S. budget deficit jumps sharply in 2020 as the government cushions the economy and remains elevated, with the Congressional Budget Office estimating it at 5.8% of GDP this year.

At the same time, the U.S. personal savings rate has fallen sharply since the start of 2024 and is back to levels not seen since the 2007-09 financial crisis. Consumer finances appear increasingly stretched by higher prices, especially fuel costs, and the University of Michigan survey shows consumer confidence at a record low, while Federal Reserve analysis indicates workers' wages as a share of GDP are slightly lower at the end of 2024 than in the 2010-19 period.

That creates a difficult policy balance for the U.S. Strong corporate profits, a shrinking budget deficit and satisfied consumers may not be achievable at the same time. President Donald Trump continues to highlight record stock market levels, but weaker consumer sentiment and lower approval ratings on inflation and the economy suggest the gains are not being shared evenly.

Investors also face the risk that persistent deficits eventually push bond yields higher. Because yields are central to equity valuation through the discounting of future profits, any sharper move upward could erode the present value of earnings even if forecasts remain strong.

Our earlier coverage of major U.S. banks’ post-stress-test capital returns explained how the Federal Reserve’s latest stress test kept large lenders above minimum capital requirements, clearing the way for higher dividends and buybacks. We highlighted actions such as JPMorgan’s $50 billion repurchase program and a dividend increase, alongside payout hikes from Goldman Sachs, Morgan Stanley and Wells Fargo—signals of balance-sheet strength that can support broader market sentiment.

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