Corporate profits shot up 40% (annualized growth) in the first quarter, compared to the fourth quarter of 2005. The 4-quarter growth is a strong 25%. Looks nice (unless you’re a socialist).
Apparently, rising costs from energy and labor have not squeezed profits yet. The largest contributor to the gain was increased profit margins; rising volumes helped, but not as much. Still, I’m concerned about the ability of companies to continue to grow margins. Slightly slower economic growth and rising costs should eventually take their toll. That would make be bearish about stocks, except . . . what else is there to invest in? Maybe take advantage of the recent dip in foreign equities.
Business strategy: Corporate CFOs should prep analysts for weaker margins in the future. CEOs should not fight the inevitable: don’t make stupid cost cuts to fight the profit squeeze. (Make cuts that are justified, but don’t go cutting just to preserve Q-1 profit margins.)