Corporate Profits Exhibit Divergent Trends Across U.S. Sectors

Nonfinancial Corporate Profits Experience Steep Decline

Corporate profits within U.S. nonfinancial industries demonstrated a notable downturn in the second quarter, following massive downward revisions for the first quarter. Wholesale trade profits plunged by 18% in Q2 from Q1, and by 26% year-over-year, settling at a seasonally adjusted annual rate of $218 billion. This decline contributed to a broader trend of weakening profitability across several nonfinancial sectors.

Simultaneously, the information industry reported unchanged profits in Q2 at a $271 billion annual rate, yet this figure represented a 12% reduction from Q4 levels. While manufacturing nondurable goods profits experienced a 17% jump in Q2 from Q1, reaching a $311 billion annual rate, they remained 9% lower year-over-year and 10% below Q4 figures. This sector, encompassing areas such as food, beverages, and chemicals, had previously seen a substantial 239% increase in profits since Q2 2020.

Significant Downward Revisions Underscore Economic Weakness

The Bureau of Economic Analysis (BEA), in its third revision of Q2 GDP, unveiled substantial downward adjustments to prior corporate profit data. Notably, Q1 profits for nonfinancial incorporated businesses were revised down by a staggering $331 billion, or 11.1%, from Q4 of the preceding year. This revision established the largest quarter-to-quarter dollar plunge since 2001 and the third-biggest in percentage terms, trailing only Q4 2020 and Q4 2008 during the Global Financial Crisis.

Despite still reporting a pretax profit annual rate of $2.64 trillion in Q1, the sheer magnitude of these revisions suggests a more challenging economic landscape for these sectors than previously understood. Factors such as tariffs are implicitly suggested as contributing to these profit contractions, particularly in sectors highly exposed to international trade like manufacturing and wholesale trade.

Financial Industry Records Robust Profit Growth

In stark contrast to the struggles observed in nonfinancial industries, the U.S. financial industry achieved a period of robust profitability. Profits within the sector rose to a record high, demonstrating considerable resilience. The six largest U.S. banks collectively reported a 20% gain in net profits from the previous year, marking one of their strongest performances in two decades.

JPMorgan Chase notably achieved a record annual profit of $58.5 billion, becoming the first lender to surpass the $50-billion mark. Goldman Sachs reported a more than three-year high in profits, with its earnings per share rising from $22.87 to $40.54, accompanied by a 16% increase in overall revenue to $53.51 billion. Similarly, Citigroup's net income surged by nearly 40% to $12.7 billion on revenues of $81.1 billion.

This strong performance was primarily driven by a resurgence in investment banking fees, which surged 34% to $36 billion in the year, propelled by increased dealmaking and capital markets activity. Trading revenue also contributed significantly, reaching $123 billion, a 10% increase. Robust traditional lending businesses further supported profits, with the largest lenders generating over $250 billion in net interest income (NII), capitalizing on higher interest rates.

Market Implications and Forward Outlook

The diverging profit trends present a nuanced picture for the broader market. The significant decline in nonfinancial corporate profits suggests a weakening economic environment, which could lead to reduced business investment, potential layoffs, and a slowdown in GDP growth. This scenario often precedes negative impacts on stock valuations across many sectors, potentially increasing market volatility.

Conversely, the financial sector's record profits, supported by a rebound in capital markets and sustained interest income, indicate a specific resilience within this segment. Analysts anticipate continued strength in investment banking revenues, projecting double-digit earnings growth for banks. Credit rating agency Fitch revised the sector's outlook from "deteriorating" to "neutral" for the coming year, citing stabilization in capital and profitability ratios. This optimism is partly fueled by anticipated interest rate cuts by the U.S. Federal Reserve and an improving economic outlook that includes a "soft-landing scenario."

Despite the positive outlook for financials, the overall market must contend with the implications of decelerating profits in core nonfinancial sectors. Investors will closely monitor upcoming economic reports, Federal Reserve policy statements, and company earnings announcements to gauge the potential for a broader economic deceleration or a more sustained, bifurcated market performance.