U.S. companiesâ vital signs have been strong
- One way to measure corporate profits is to look at earnings as a percentage of the economy. By that measure, corporate profits in mid-2011 accounted for 13% of gross domestic product, the largest percentage since 1950.
- Some of the increase in profits can be attributed to cost cutting at corporations and increased productivity. In short, many companies are doing more with less. The resulting efficiencies have led to higher profits.
- Why are corporate profits so high when GDP is relatively anemic? Partly because U.S. companies are increasingly able to boost their revenues and earnings by doing business in many countries. The chart shows data for nearly all U.S. companies, but a look at a smaller group provides evidence of the trend. According to Standard & Poorâs, in 2010 about 46% of all S&P 500 sales originated outside the U.S., partly because of demand for goods in developing countries.
âRight now, corporate profits in the U.S. are at record highs by some measures. Margins are extremely high; corporate profits, as a share of national income, are extremely high. And thatâs in an environment where the economy hasnât been that robust.â
â Eric Richter, portfolio manager Capital Research and Management Company
Investing in Europe: Itâs about the companies, not the countries
- Recently, Europe has been shrouded in gloom. Yet many companies in Europe are thriving.
- Thatâs partly because a number of dynamic companies in Europe are doing the bulk of their business outside their country of domicile. As a result, investors need a global perspective to evaluate companies in any single market.
âWe look for companies, in Europe and elsewhere, with diverse revenue streams and exposure to customers and clients around the world. Many European-domiciled companies are not necessarily impacted by the economic state or momentum of any individual country in Europe.â
â Mark Denning, portfolio manager
