Announcer:
4 Your Money is brought to you by Nelson Corp Wealth Management.
Brandy Auterson:
It’s now time for, 4 Your Money. We’re joined by David Nelson, CEO of Nelson Corp Wealth Management. Welcome back, David.
David Nelson:
Thank you, Brandy.
Brandy Auterson:
The first couple of quarters of 2021 have had a remarkable earnings rebound, but you say there’s more to this story. Share with us your thoughts on that.
David Nelson:
Yeah, there really is. Earnings get all of the attention as far as in the media and unfortunately, again, we think a more important one that folks should be looking at. I brought along a slide to illustrate this and it’s going to be a really nice visual for folks. So we’ve got a lot of action on here, but I’ll try to explain it. So we think profit margins are key and if you look at the very far right, we’ve got it circled, we’re at record highs for the S&P 500 as far as profits are concerned, profit margins are concerned. Now, if you go back to the far left, which you see is that’s going to be in the 1990s and then the middle is going to be the 2000s. You see profits that are running at roughly 8%, the peak. It was 8% for the 90s, 9% as far as for 2000s, and gosh, darn today, we’re over 11%. So these are just bone-crushing numbers, and it probably explains the massive rally that’s taking place over last year or so.
Brandy Auterson:
So tell us, how do the financial markets tend to react to profit margins?
David Nelson:
Pretty quickly and abruptly sometimes, favorably in recent times because of what’s taken place, as far as the snapback that we’ve seen as far as in corporations from COVID here. But it’s interesting, what folks would perceive probably, corporate profits hitting all-time highs would translate into markets should be probably hitting all-time highs. That’s not always the case. Usually, it’s just the exact opposite. You see the lulls as far as in the economy and the market. Typically, you’re going to see a snapback and it’s going to be very dynamic as far as when those profits turn, as far as on an upward trajectory.
Brandy Auterson:
So what do you think we could see going forward with regards to earnings and profits?
David Nelson:
So it’s very industry specific and so if we look at technology, technology profits are just off the charts. More specifically software profits are really off the charts now. So that’s terrific and again, as people could probably surmise, because of that and the growth of technology and what’s taken place, it’s a bigger part of the S&P as far as the S&P 500 index.
David Nelson:
Now, if you look at energy and industrials, very intensive, as far as investment that they goes into that. Unlike technology and software, fixed costs much better. So keep an eye on the potential tax increase that’s probably the biggest driver right now. If we get this tax increase, we’re probably going to see a pretty significant bump, as far as in the market.
Brandy Auterson:
If you missed any of our discussion, we’ll make it available for you on our Quad Cities.