Corporate profits in the US have soared to unprecedented levels, with after-tax margins reaching 10.7% in the second quarter of 2021, the highest since 1947 when adjusted for inventory valuation and capital consumption. While these margins have slightly decreased, they remain robust. This surge in profitability is drawing scrutiny, with some, like former US Secretary of Labor Robert Reich, arguing that corporations are exploiting their market power to raise prices beyond what is necessary to cover increased costs, a practice dubbed "greedflation." Reich contends that in a competitive market, companies with record profits would absorb some rising costs rather than passing them entirely to consumers.
Several factors contribute to this profit growth. While companies like Procter & Gamble defend price hikes by citing rising input costs—such as caustic soda and ammonia—their recent quarterly results showed increased profit margins despite lower sales volumes, as prices rose by about a tenth. This has led to executives having to justify price increases amidst a cost of living crisis for consumers. Additionally, analysis suggests that rising government deficits have played a significant role, accounting for over half of corporate profits this decade, twice the level seen during the dot-com era. This implies that a portion of corporate earnings is amplified by government spending and tax cuts.
However, there is debate on the exact causes. ING acknowledges the difficulty in definitively attributing profit margin inflation to "greedflation," suggesting that companies might also be recovering losses incurred during the COVID-19 lockdowns or building up financial buffers. Regardless of the underlying causes, these record profits carry significant reputational and potentially legal risks for companies. Experts like Nir Kossovsky, CEO of Steel City Re, advise boards to ensure robust conversations around pricing strategy and demonstrate thoughtful risk management processes to address concerns from policymakers and the public.
Looking ahead, the discussion around corporate profits and pricing is intensifying. Policymakers are facing increasing calls to investigate "greedflation," with some arguing that companies are taking undue advantage of geopolitical and supply chain issues to boost their bottom lines. The Financial Times has also highlighted that tech giants, particularly Alphabet, Microsoft, Meta, and Amazon, face rising regulatory risks if AI-driven profit concentration continues without proactive measures to share wealth, potentially leading to forced redistribution through regulation or taxes.
Ultimately, while American corporate earnings are globally robust, underlying vulnerabilities exist, some masked by government support and others in private markets. The sustainability of these high profits, particularly in the face of public discontent over inflation and potential regulatory interventions, remains a key concern for companies and investors alike. A visible rise in white-collar unemployment due to AI could accelerate regulatory timelines for wealth-sharing policies.
