How on Earth Can Profits Grow at 10% in a 2% Economy?

Fortune ^ | 27 July 2017 | Shawn Tully

[Lorianne]

Can profits really grow in double-digits in an economy bumping along at 2%?

That's the question that investors should be asking, and instead ignore at their peril. We've all heard the Wall Street bulls' mantra, endlessly advanced by analysts and market strategists, that a renewed surge in profits will keep equity prices waxing. The current consensus among analysts forecasts that reported S&P earnings-per-share will jump from $100.29 in Q1 of 2017 (based on the past four quarters) to $133 by the end of 2018, an annualized increase of over 18%.

Of course, those consensus forecasts are always inflated. But even if we discount those projections by 45%, the bulls are still expecting 10% gains in EPS over the the seven quarters spanning Q2 2017 to Q4 2018.

But recent history, and projections from every agency from the IMF to the CBO, foresee GDP growth in the 2% range, or 4% including projected inflation, well into the future. So how can the profits expand 6 points faster than the overall economy that drives the sales that largely determine the course of those profits?

[Triple]

Yep!

[mjp]

Can profits really grow in double-digits in an economy bumping along at 2%?

They measure different things. GDP is related to aggregate demand and profit is a measure of the difference between sales revenues and costs.

[Rashputin]

Citing an exception in no way denies the rule and highest profits in a case where the person or persons making the decisions own a controlling interest in the company means nothing when such cases are in fact themselves the exception rather than the rule.