Boston Portfolio Advisers, LLC

Six Beacon Street, Suite 925, Boston, MA 02108
Wealth Management for Individuals, Families and Organizations

Helped in part by reduced tax rates corporate profits soared in the first quarter. With the vast majority of S&P 500 companies having reported, earnings are up over 24% as compared to the first quarter of 2017. That’s an astonishing increase this late in an economic expansion.

The good news is that higher earnings make price-earnings ratios, which had ventured into extreme territory, look considerably more rational. It’s not unreasonable to think that S&P 500 earnings could come in at around $140/shr in aggregate for the full year. (As always we’re talking about reported earnings, not operating earnings, a.k.a. earnings without the bad stuff.) That would put the price-earnings ratio at a shade under 20. Interest rates have climbed but they’re still pretty low, so that p-e ratio may not be unreasonable.

The problem is that profit margins are sky-high and you have to wonder if they are sustainable. As the red line in the chart below (courtesy of Ed Yardeni) illustrates, S&P 500 profits are running at 10.2%, a level we’ve basically never seen. What could bring profit margins down? Increased input costs on everything ranging from wages to commodities to transportation for one. Or, heaven forbid, a recession.

To some degree higher profit margins are a natural consequence of an intellectual property based economy. 10.2% would be a terrible year for a lot of the technology companies that are increasingly dominating the S&P 500. Still, it would probably be best not to count on profit margins remaining as high as they are right now.

Boston Portfolio Advisers, LLC

Six Beacon Street, Suite 925, Boston, MA 02108

phone: (617) 227-7807 | fax: (617) 227-7809
email: Info@BostonPortfolioAdvisers.com

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