Coined by bond giant Pimco, that view posited a long stretch of anemic economic growth for the U.S. economy as households focused on paying down debts (thereby dampening demand) and as increased government intervention created more barriers for corporate profits. Earnings and stocks were doomed to suffer as a result.
But as third-quarter profits show sharp gains, investors should brace for a "new, new normal": a time when the fate of the U.S. corporate sector becomes increasingly decoupled from national economy.
Unemployment continues at dangerously high levels in much of the U.S., and the overall economy is in fact tepid. But this isn't getting in the way of booming corporate profits, and that new reality should be informing everything from investment decisions to overall economic policy.
It's Not Just Cost-Cutting Anymore
So far, third-quarter earnings have been very impressive, with 85% of companies topping analyst estimates. And expectations on Wall Street are now surging further, with October's estimates being far higher than what has been normal since 1990, according to research by Citigroup. Forecasts of record profits for 2011 seem increasingly credible.
Nor do tired arguments that surging profits are coming solely from cost-cutting hold much water. Revenue per share for the S&P 500 may be off the highs of the last credit-fueled binge. But they're still at levels first seen in 2006 -- hardly a horrible time for the economy -- and they seem to be in for a healthy rebalancing.
Some financial players have seen revenue fall dramatically, and rightly so. Citigroup (C) did an amazing $159 billion in revenue during 2007. However, third-quarter 2010 revenue came in just under $21 billion, putting the giant bank on track for about $85 billion in revenue this year on an annualized (but not seasonally adjusted) basis.
Or take Investment bank Goldman Sachs (GS), which pulled in $88 billion during 2007. Annualized earnings this year would be closer to $36 billion judging by the $8.9 billion in quarterly profit the company announced last week.
Turning to Booming Emerging Markets
But things are much better for American companies that make world-class products. Chipmaker Intel (INTC) is predicting revenues of between $11 billion and $11.8 billion for the next quarter. Even at the lower end, that would put the company well ahead of the $38 billion in sales it hauled in for 2007.
Against this backdrop, investors should note that corporate profits and stocks have fared much better than proponents of the "new normal" might have expected. Multinational corporations are finding their fate tied less and less to the U.S. economy as they turn to booming emerging markets for growth.
Therefore, trying to boost demand by cutting interest rates or embarking on another round of quantitative easing, seems like an insufficient way to tackle problems like joblessness in the U.S. The old adage that what's good for General Motors is good for America continues to have its intuitive appeal. But as GM's business booms in India, investors should recognize that thriving corporate profits are less related than ever to a thriving U.S.