RPT-BREAKINGVIEWS-Blowout US earnings veil a turning economic tide

By Sebastian Pellejero

NEW YORK, May 12 (Reuters Breakingviews) - Corporate America is impressively stoic amid a chaotic world. With 86% of results in, first-quarter earnings for members of the blue-chip S&P 500 Index .SPX are tracking 27% above last year, says Bank of America. Resilient demand and tight cost control have produced record profitability. Yet this is down in part to passing uplifts, like a weakening dollar and roaring artificial intelligence-linked investments. Investors should not confuse excellent timing with a sturdier expansion.

U.S. firms have become immensely efficient at grinding out increasing top-lines against steady costs. First-quarter sales are on pace for 7% year-over-year growth so far, adjusted for currency fluctuations, and inflation, the strongest rate since 2021. Net profit margins stand at an average of 14.6%, surpassing their previous peak. The standout performance isn’t limited to the so-called magnificent seven technology giants, either. Earnings for the S&P 500 excluding the septet are up 17.1%, according to FactSet, the fastest pace in 17 quarters.

There are some oddball asterisks. Look back at the tech titans, and their circular investments in AI labs like OpenAI and Anthropic are producing massive paper gains as chatbot makers raise funds at ever-higher valuations. Google parent Alphabet GOOGL.O and Amazon.com AMZN.O recorded about $53 billion in investment income, or roughly 60% of their combined net profit. Meanwhile, Meta Platforms META.O recorded a tax benefit that raised earnings per share by about 30%. Adjusting for those fillips, earnings growth for the overall S&P 500 falls closer to 18%.

Currency provided another boost. A weaker dollar added two percentage points to sales growth, according to BofA. Meanwhile, tariff refunds, due after the Supreme Court struck down President Trump’s trade levies, are already flattering some income statements. Ford F.N recorded a $1.3 billion benefit tied to a potential payback this past quarter, representing more than a third of adjusted operating profit. U.S. importers could claim about $180 billion in rebates, Goldman Sachs reckons.

These one-off boosts stand against a potential long-term drag: the weakening of the American consumer. Tax refunds and broadly enjoyed boosts from a rising market firmed up recent spending. Yet credit-card delinquencies sit at a 15-year high, new home prices are down to their lowest level in five years, and retail demand is barely growing when adjusted for inflation. The danger is that Americans will start drawing on savings to service debt if the labor market sputters.

War in Iran adds one more test. Rising oil prices are already leading to sticker shock at the gas pump. Potential truce or no, petrochemical shortages are already spreading. Trading at 22 times next year’s expected earnings, the S&P 500 is priced for more than one well-timed quarter. It’s an increasingly risky bet.

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The S&P 500 Index hit an all-time high on May 11, when it closed at 7,412.84.