Profits and Stocks

The Commerce Department's recent GDP revisions show a slight upward adjustment in Real GDP growth, now estimated at 2.3% annually since 2020, but a more significant revision to corporate profits, with pre-tax profits 11.5% higher and after-tax profits 13.3% higher than previously thought. Using the Capitalized Profits Model, the S&P 500 appears overvalued by 18%, although using after-tax profits suggests it may be fairly valued.

The corporate tax rate, currently at 21%, plays a crucial role in stock valuations. Potential tax cuts could boost profits, while tax increases, such as a proposed hike to 28%, would reduce them.

Despite upward profit revisions, risks remain, including possible tax hikes, declining money supply, and recession concerns. The stock market, while not cheap, has sectors that are less expensive, but overall caution is advised.