Where are U.S. businesses headed?

At first glance it may seem 2010 and 2011 corporate earnings are experiencing a strong recovery, and according to Standard and Poor's aggregate S&P 500, revenue has been growing and reached an all time high of $770.5 billion in 2010. So there is reason to believe corporations are in fact doing well from an earnings stand point even if profit margins have been relatively flat.

Global GDP growth does provide an intrinsic opportunity to increase revenue further, but this is challenged by not having a home team advantage so to speak. Domestic companies tend to have a better chance at success in familiar regulatory environment, lower language barrier and easier to access the market in general. This poses a challenge, but not necessarily a limit on U.S. companies' revenue.

The long-term trend has seen a shrink in the U.S. share of global GDP and a decline in internationally held U.S. foreign exchange reserves. Specifically, according to the IMF and as quoted by Credit Writedowns, the drop in foreign held U.S. reserves was 9.1 percent between 1999-2010 (Q2). The Euro and Pounds Sterling have picked up the slack. This indicates a shift in confidence, hedging of reserves and competition from the Euro which generally devalues the dollar.

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With impending budget issues facing the U.S. government, and a recent Standard and Poor's issuance of  a negative U.S. AAA credit rating from secure highlights the concern. Extended tax cuts expire in 2010 along with tax credit like the Making Work Pay tax credit and national debt of approximately 100 percent of GDP in addition to a bloated government budget deficit have to be tackled. The result will likely be cuts and possibly tax increases. If those cuts or increases affect businesses in any way, it won't spell easy money. 

The S&P 500's strong corporate earnings are like the lone marathon runner a full mile ahead of U.S. consumers, smaller businesses, state governments and the federal government that have been investing faith in them as the drivers of employment, market growth and at the expense of an un-materialized employment. Those profits did come from cost cutting in part, but the bigger picture is missing here and the question of sustainability is yet to be answered.

Image license: Olga Tarkovskiy, CC BY-SA 3.0