The S & P 500 hit several new highs in August, driven by corporate profits that reached a post-war record in the second quarter when measured as a share of the total economy. Pre-tax profits hit $4.8 trillion, or 17.9% of national income, according to Commerce Department data for the quarter . That’s the highest share ever, since records began in 1947. Profits after tax also hit a new all-time high, rising to 14.6% of national income, almost a full percentage point above their first-quarter share of 13.7%. Enthusiasm on Wall Street amid the profits bonanza is high, driven by second-quarter corporate earnings that have substantially outpaced expectations. Second-quarter earning-per-share for the S & P 500 are up 50% annually, according to a report Sunday from investment bank Evercore ISI. “We are living in extraordinary times,” analyst Julian Emanuel wrote, calling the second quarter “one of the best earnings seasons ever.” As the profit share of national income has increased, the labor share of total income has fallen since the early 1990s, with employee compensation dropping to 60.2% in the second quarter, the smallest slice of the economic pie since 1951. The shifting mix is likely being driven by a high capital share of productivity – essentially faster technology investment cycles – but investors caution that stock values relative to other assets are likely being inflated as a result. Cyclically adjusted price-to-earnings ratios for the S & P, an index known as CAPE , famously developed by Nobel Prize-winning Yale economist Robert Shiller, is at its second-highest level ever, trailing only those reached before the dot-com bubble burst in 2000. “The CAPE is at scary levels,” Dan Alpert, founding managing partner at Westwood Capital told CNBC Tuesday. “You have to ask yourself the question: Why is anyone taking this risk in a market that’s hyperinflated from a value standpoint when they can look to fixed income to obtain some excellent returns? At some point, that cracks. The question is when.” September is a traditionally bad month for the major stock market averages, and analysts are bracing for additional volatility ahead of the midterm elections in just nine weeks. September is the single worst month of any given year, in data going back to 1950, according to the Stock Trader’s Almanac. The S & P 500 has fallen by an average 0.7% each September. “Peak EPS growth has tended to be followed by near term equity market choppiness, accentuated this time by challenging macro/fall seasonality and volatility – the rule, not exception, into midterms,” Evercore’s Emanuel said. The profit share of the U.S. economy returned to its post-war highs around the beginning of this century, but ratcheted up to a new level in the aftermath of the 2020 pandemic following huge amounts of government spending pumped into the economy.
