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Posted May 28, 2025 at 11:49 am
Corporate profit growth has tended to come in below the pace of GDP expansion in the last few reports. In the three-year period beginning in the fourth quarter of 2021 through the final quarter of last year, average profits grew 1.7% on a quarter over quarter, seasonally adjusted, annualized basis while real GDP averaged 2.7%, a full percentage point higher. The tendency to come in below GDP is interesting as it relates to corporate profit ForecastTrader contracts expiring tomorrow, alongside the second estimate of first-quarter GDP.
Considering that first-quarter GDP printed at -0.3% alongside the historical trend of profits being lower than economic growth, I think it’s going to be challenging for profits to expand at the same 5.9% rate of the fourth quarter. Another important fact though is that every time corporate profits exceeded 5% during the last three years, they have declined to below that level in the subsequent quarter. My estimate of tomorrow’s figure is -1.5%, but I do acknowledge that the series is volatile and especially difficult to forecast. Furthermore, the first quarter’s negative GDP number was unusual because of the liberation day tariffs and the associated surge in imports in March as businesses sought to avoid levies. Nonetheless, I like the risk-reward profiles of the “No” answers at the 4.9% 6.9%, 7.1%, 9.1%, 11.1% and 13.1% thresholds, which range from $0.63 to $0.96 in price. For a potential home run, check out the “No” answer at the 0.9% threshold, which costs just $0.08. Finally, and once again, exceeding 5% in consecutive quarters has not happened in the past three years, and I think it’s highly unlikely it will occur tomorrow in light of the first estimate of first-quarter GDP being negative.
Source for Images: ForecastEx
Note: Prices are highest bids as of the morning of May 28, 2025. Red circles around the thresholds were inserted by J. Torres to highlight his preferred “No” answers throughout different thresholds.
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