Profit growth helps fuel Wall Street’s record run

Halfway home, and earnings season is exceeding expectations

The stock market has a new grade of fuel propelling it higher: high-octane profits from U.S. companies.

Fatter profits earned by the nation’s big employers such as McDonald’s, Caterpillar and Boeing are good for Main Street investors who own stocks in 401(k) accounts. It also is a potential plus for U.S. workers who benefit from healthier, more confident companies that might be more willing to expand their businesses, hire more people and boost wages to meet growing demand.

“Strong profitability says the vibrancy of American business continues to improve,” says Alan Skrainka, chief investment officer at Cornerstone Wealth Manage- ment in Des Peres, Mo. Wall Street’s second-quarter

earnings season, which is at its halfway point, is exceeding expectations. The companies in the Standard & Poor’s 500 stock index are on course for overall profit growth of 10.7%, up from 8% on July 1. That puts the broad stock market gauge on track for backto-back quarters of 10%-plus growth for the first time since 2011, according to earnings tracker Thomson Reuters.

Stronger profitability for U.S. companies can trickle down and benefit Americans. Here’s how:

Provides support for stock prices. Even though just 54% of Americans own stocks, according to a recent Gallup poll, investments in stocks through 401(k)s, IRAs and other types of accounts still rank as the secondlargest asset held by Americans, aside from their homes, says Bill Northey, chief investment officer at U.S. Bank Private Client Group in Helena, Mont.

Lowers economic angst. “At the moment there is very little indication that we are near a recession in the U.S. or any of the older, established economies around the globe,” says Bill Stone, global chief investment strategist at PNC Asset Management Group in Philadelphia.

Suggests a brighter outlook. “It’s a harbinger of good things to come,” says Dan North, chief economist at Euler Hermes North America, based in Owings Mills, Md. “When profits are good, it allows companies to grow and hire people.”

Keeps stocks from getting too frothy. The price-earnings ratio is a common measure of how frothy the stock market has become. And while the current P-E of nearly 18 times earnings is above the longer-term average of roughly 15, according to Thomson Reuters data, higher earnings reduce the chances of stock prices getting overly inflated relative to what companies can generate in profits. “I am relieved to see strong earnings,” North says, “because valuations are rich and profits need to support higher valuations.”

Shows a healthy U.S. consumer. Sure, many retail stocks might be heading south, but that doesn’t mean shoppers are in trouble. Leigh Drogen, founder and CEO of Estimize, a crowdsourced earnings platform, points out many of the nation’s payment processors — such as Visa, MasterCard and Paypal — all have posted “incredibly strong earnings.” And that performance, he adds, “says a lot about the health of the consumer.”