US Corporate Earnings Expected to Remain Strong in Second Half of This Year... Slight Improvement Anticipated Next Year Compared to This Year

International Financial Center Report on 'US Corporate Earnings Status and Economic Factors Review'

US corporate earnings have shown a favorable trend again in the second half of this year, raising expectations that they may improve slightly next year compared to this year.

The International Finance Center recently stated in its report titled 'Current Status of US Corporate Earnings and Economic Factor Review' that although US corporate profits have been experiencing a short-term growth slowdown since the fourth quarter of last year, the prevailing view is that a favorable trend is expected again from the second half of this year onward.

According to the report, S&P 500 companies have seen a slowdown in earnings growth since last year due to rising costs from high inflation and proactive inventory adjustments. In particular, profits declined year-on-year for three consecutive quarters from the fourth quarter of last year through the first half of this year.

Market participants are anticipating a positive turnaround in earnings starting from the second half of this year, as inflation has recently eased and the probability of an economic recession next year has decreased.

Despite forecasts of consumer slowdown, the report analyzes that a favorable trend in capital investment supported by policy measures and the potential improvement in the inventory cycle following steep inventory adjustments are positive factors for corporate profits. However, the recent visibility of rising interest expenses amid a tightening credit cycle could pose a burden.

Regarding capital investment, although the growth rate has slowed this year due to companies' financing cost burdens, it continues at a relatively favorable level compared to the past. Non-residential fixed asset investment increased by 9% year-on-year cumulatively from the first to the third quarter this year.

Deteriorating credit conditions are a factor suppressing capital investment, but government policy support, supply chain reshoring, labor supply-demand imbalances, and the need to improve productivity act as mid- to long-term drivers for capital investment growth.

Researcher Eunjae Lee of the International Finance Center explained, "The US manufacturing sector has been in a slowdown phase since November last year, but recently, manufacturing inventory circulation indicators and the new orders-inventory spread have shown a rebound."

Global investment banks such as Societe Generale and Bank of America have forecasted that with low inventory levels and the US economy maintaining solid growth, there is potential for improvement in the corporate earnings cycle through future inventory rebuilding.

Regarding the credit cycle, it has recently become apparent that companies' interest expenses are increasing, and considering the lagged effects of interest rate hikes, the burden of interest expenses and the risk of an increase in distressed companies may rise in the future.

According to the Federal Reserve Bank of Boston, the impact of past Federal Reserve policy rate hikes on non-financial corporate interest expenses peaked about one year (4 to 5 quarters) after the rate hikes.

Researcher Lee said, "There is a growing weight to the possibility that US corporate earnings will improve slightly next year compared to this year. However, as monetary tightening and high interest rate effects are expected to fully materialize, downside risks will also be significantly latent."

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