The first trading day of June saw mixed market signals as tariff concerns and geopolitical tensions weighed on risk appetite, though Wall Street rebounded late in the session following an upward revision to the Atlanta Fed's Q2 GDPNow estimate to 4.6%. Despite a 2.9% drop in U.S. pre-tax corporate profits in Q1, the report suggests that corporate America is well-positioned to weather potential economic headwinds, with profits as a share of national output remaining near record highs, even as domestic profits outpace those generated abroad.
The new trading month commenced with initial caution stemming from U.S.-China trade tensions and geopolitical uncertainties, but a late Wall Street session rally saw the S&P 500 rise by 0.4% and the Nasdaq gain 0.7%, supported by gains in the energy sector and specific tech stocks including Meta and AMD. Key catalysts for this positive shift included an upward revision of the Atlanta Fed's Q2 GDPNow estimate to a strong 4.6% and tentative optimism surrounding a potential dialogue between U.S. President Trump and China's Xi Jinping. This market behavior followed a notable May performance where U.S. equities significantly outpaced Treasuries, with the S&P 500 delivering a 6.2% gain against a -1.57% total return for the 10-year Treasury, marking the widest outperformance since October 2022. In parallel, the U.S. dollar weakened by 0.6% on an index basis to a six-week low, U.S. crude oil (WTI) approached $64/bbl following OPEC+'s decision to maintain current output levels, and gold prices surged 2.8% to $3,380/oz, driven by trade frictions, geopolitical risks, and the depreciating dollar. U.S. Treasury yields increased, especially at the long end, leading to a steeper yield curve, with 20- and 30-year yields nearing 5.00% amidst concerns over tariffs and inflation, even as Fed officials like Christopher Waller and Austan Goolsbee indicated the possibility of interest rate reductions later in the year. Despite these macroeconomic crosscurrents, an examination of corporate fundamentals reveals considerable resilience. U.S. pre-tax corporate profits experienced a 2.9% decline ($118.1 billion) in Q1 2024, the most significant drop since 2020, and after-tax profits fell 3.6%. However, this is largely viewed as a normalization from an exceptionally strong fourth quarter, where profits had surged by 5.4% ($205 billion), and importantly, year-over-year profits still registered an increase of over 5%. Corporate profitability relative to national output remains near historic highs: pre-tax profits (with inventory and capital consumption adjustments) were 13.0% of GDP in Q1, compared to a record 13.5% in Q4 2023, while after-tax profits stood at 12.0% of GDP, far exceeding the 75-year average of below 7.5%. A significant trend is the growing proportion of domestically sourced profits, which constituted 87.5% of the total in Q1 2024, while the contribution from international operations (RoW) has diminished to 12.5%, halving from its Q4 2019 share. Although corporate America faces mounting headwinds—including tariffs, risks of weakening consumer demand, reduced pricing power, sustained higher interest rates, and downward revisions to S&P 500 earnings growth forecasts by LSEG I/B/E/S for Q2 (to 5.5%) and for the 2025 calendar year (to 8.3%)—the underlying financial strength of U.S. companies appears robust, positioning them well to confront potential economic adversities.
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