L'Economy of Market: a Reading from the Business Profits

Profits or indicators of the economic cycle

To understand where we are in the business cycle, we need to look at the trend in corporate profits, which represent the real lifeblood of investment, employment and financial markets.In official statistics, US business profits recorded in the second quarter of 2025 only a minimal increase, accompanied by a strong downward revision of previous estimates. This indicates that profitability is not accelerating as would happen at the beginning of a new expansionary phase. At the same time, although real GDP has been revised upwards up to 3.8% annualised, this growth is largely artificial, sustained by a temporary drop in imports after the previous quarter's surge related to duties. The real worrying signal comes from consumption: household spending remains weak, and since it is the result of revenues and therefore profits of companies, the dynamics suggest an economy in mature or slowing down, so not at the beginning of a new cycle of growth.

The correlation with the pil

Just look at some graphs and we notice immediately how profits and GDP move together, showing a strong cyclical correlation, so when business profits rise up GDP tends to grow, when GDP collapse slows down and enters recession, it follows that business profits are an forerunner of the economic cycle. When volatility is greater than profit profits amplify economic cycles by rising and falling sharply, in practice profits react excessively to changes in demand and costs. As for recessions, graphs show that in almost all those occurred from 1970 to 2020 profits collapse before or together with GDP, and immediately after the recession profits tend to bounce back quickly signaling the start of economic recovery. After the pandemic collapse of 2020 there was an exceptional peak in profits in 2021, followed by a rapid blow in 2022-23, on the other hand GDP maintained stable growth but still slowing down, this means that the post-pandemic cyclical push is running out. Today the growth of profits in America is modest compared to the post 2020 boom, suggesting that the American economy is at an end-of-cycle or pre-slowning stage and not in a new expansionary boom.

Business profitability hampers growth

However, behind a seemingly brilliant economic growth figure, there is a more sober reality, the one for which the drive of corporate profits is much weaker. In essence, production has increased, but profits have not followed the same pace. This divergence is important because, for those who invest in shares, it knows that what really counts is not GDP but the growth of profits. In the second quarter of 2025, corporate profits after taxes reached about 3,26 trillion dollars on an annualized basis, a high level, but without signs of acceleration, at the same time, net margins are under pressure and general economic growth shows signs of slowdown.

The economy therefore seems to move in a wavering phase, with still high but stable margins, a combination that, combined with already high equity valuations, makes it harder to obtain strong future returns. If you look at listed companies, a similar picture emerges, inact according to the data FactSet, the aggregate profits of the S&P 500 in the second quarter 2025 have grown compared to the previous year, with average margins around 12.3%, above the historical norm. It is a positive news, but largely already discounted in the market prices. Moreover, the rest of the economy, in particular the smaller and unlisted enterprises, does not show the same momentum, creating a marked gap between the corporate sector \'visible \\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\

In perspective, Real Investment Advice analysts point out that in the long term profits and economic activity tend to move together. Profits can temporarily overcome real growth through tax incentives, accumulated savings or trade imbalances, but these pressures do not last and sooner or later, economic reality brings margins and assessments back to more sustainable levels. The personal expenses of American consumers and the change in corporate profits after taxes show 2 related developments, in fact, when consumer spending accelerates, profits tend to rise, when slow profits collapse, in each recession there has been a simultaneous decrease of both, in the years after the post-covid boom (2021), the expenditure and profits have both cooled, stabilising on more modest models, this suggests an economy that has exhausted the demand and is now in the phase of mature growth without new expansionary forces.

With regard to non-financial business profits as a percentage of GDP and GDP growth rate, historically, the share of profits on GDP fluctuates but tends to return to a long-term average, after the peak of 2021, the trend has shown a plateau and a decline start, meanwhile, GDP growth has slowed down, so the relative profitability of enterprises has reached a maximum cyclical, but still high profits do not grow faster than the real economy, signaling a possible decline in the final stage of the cycle.

The profits of small private companies and profits of large listed companies can be seen as growing gaps since 2000, with large public groups increasing their share of profitability (over 40%) while small companies falling by 30%, reflecting an increasingly concentrated economy, where large operators (multinationals, S&P 500 companies) benefit from economies of scale, access to capital markets and price power, while small companies remain more exposed to compressed costs and margins. This divergence explains why equity indices can appear solid even when the most widespread economic fabric does not show the same strength.

The myth of corporate greed

Businesses do not create inflation, they suffer and adapt. When consumer demand is strong and supply is low, they can increase prices to compensate for the higher costs but when demand slows down, they are forced to reduce them to continue selling. In other words, companies react to economic conditions, they do not determine them, inflation arises from an imbalance between money, demand and supply, not from the greed of companies. The theory that inflation is caused by greed of companies does not stand, inflation arises from an imbalance between supply and demand, not from the desire of companies to increase prices. During the pandemic, governments have closed the economy (reducing supply) and simultaneously flooded the liquidity families with cheques and subsidies (increasing demand).

This combination has caused prices to rise.inflation is always and everywhere a monetary phenomenon.is the result of too much money in circulation compared to the available goods, and only the government and the Federal Reserve, which control the printing of money and tax policies, can cause it. Businesses, consumers or unions do not have a ... ..$ print to generate it.

Businesses only increase prices if their costs rise (raw materials, wages, energy) and demand is strong enough to sustain them. When demand falls, they are forced to reduce prices and margins. The recent decline in profits and inflation is proof of this. These public policies (such as increases in minimum wages or excessive incentives) and Wall Street's speculation on commodity markets contribute to pushing prices, but not to corporate greed, are the side effects of political and financial decisions.

Therefore, inflation is not the result of the greed of companies but of the choices of governments and central banks that place too much money in the system and alter normal market balances. Companies are not charitable bodies, so they react to economic incentives to survive and reward shareholders. After the pandemic the debate on inflation has reopened, with the question whether the margins of the company were the cause or the consequence, and as the ECB and the Federal Reserve confirm, companies do not generate inflation, but suffer the effects.

The price increase was the result of the imbalance between exceptionally strong demand, inflated by public stimuli, and a supply limited by production interruptions during the pandemic. At that stage, companies managed to maintain or expand margins because demand exceeded supply. However, once supply chains were reestablished and consumption normalized, this effect has been exhausted, the increases no longer depend on profits, but on real costs and dynamics of supply and demand. Looking at profit margins and inflation we can notice how these (profits) follow inflation, do not cause it. During the expansion phase, companies benefit from the increase in demand but when demand decreases, margins are squeezed.

This confirms the idea that companies react to inflation, not generate it. Market assessments remain high because investors assume that record margins will last, but macroeconomic reality suggests the opposite, with less fiscal stimulus and weaker demand, defending profitability will be increasingly complex, and markets risk serving expectations of over-optimistic profits. The inflation of unit prices of non-financial companies is closely linked to labour costs and total costs per unit output. After the 2008 crisis, labour costs and business prices remained contained for over a decade, reporting a phase of low inflation and stability of margins. In 2021

This trend confirms that recent inflation does not arise from the "excessive" profits but from a temporary increase in costs and the distortion of demand/supply. Today, with the normalization of costs, companies can maintain margins only if the growth of revenues remains stable. By comparing instead the cumulative trend of the real profits of the enterprises with that of the real S&P 500 is noticed as in the historical phases of equilibrium (60s,

However, in several stages such as the 2008 financial crisis and the currentCentral Bank Bubble, l.S.&P 500 is growing much faster than profits. This indicates that stock valuations have inflated beyond the fundamentals thanks to ultra-expanding monetary policies and low interest rates. Today the gap between market and profit is again wide, suggesting a potential over-estimate and a risk of correction if profitability slows down. So if government deficits and tax incentives are reduced and real profits are not keeping pace, markets, supported more by liquidity than by actual growth, become vulnerable.

Markets and a non-existent reality

In 2025, financial markets seem to be running faster than fundamentals. Investor stock valuations and optimism are at the highest historical level, but real corporate profits are growing little. L .S.&P.500 deals with multiples of P/E among the highest since 1985 (about 22.5 times the expected profits), a sign that growth expectations are very high. However, if profits disappoint even slightly, the risk of corrections increases because the margin of error is minimal. Moreover, the historical correlation between GDP growth and profits is divergent indicating that markets are more hopeful than economic reality. Investors' sentiment is strongly positive, supported by a few

When optimism, concentration and high valuations coincide, the market becomes fragile, that is, only revisions of profits are sufficient 'less brilliant ' to create sudden volatility. A part of the apparent solidity of profits still comes from massive buybacks, which reduce the number of shares in circulation and inflate profits per share, but do not increase the real profits of the economy. It is an accounting effect, not productive, and reduces the available capital for future investments. Today in markets, real profits, not expectations, pay the accounts. Better that portfolios remain anchored to that reality. So you should take profit where prices are drawn, accumulate on the lowers, keep diversification, and let choices be guided by real data, not sentiment.

The market divided between optimism and risk

The market today: Scott Rubner of Citadel Securities describes a market in balance between strong expectations and more fragile fundamentals. On the one hand, optimism about cuts in rates, progress in ics, productivity growth and solid profits continues to push the indices, especially in tech. On the other hand, the signs of imbalance are multiplying: high valuations. only partially tamed inflation, slowdown outside the driving sectors and positions of the now extreme investors.

BULL CASE= Today optimism still has solid foundations, this is because the bulls aim at 4 main forces:

BEAR CASE= It must also be said that the risk elements are equally clear:

Among the possible negative triggers is a new inflationary flame, a more cautious Fed on cuts, disappointments on non-tech profits or geopolitical shocks.

In this market, we must maintain flexibility, that is, keep liquidity ready and not be totally exposed. Focus on quality, favour solid societies, with strong budgets and real cash flows, avoiding 'fashioned' securities that are too expensive. Manage risk actively, use coverage (options, reverse ETFs, long volatility), reduce concentrations and rebalance periodically. Rotate sectors, if rates drop, favor cyclical and industrial; if risks increase, take refuge in defensive. Stay realistic, future returns will probably be smaller and volatile; the objective must be to preserve capital, not to chase euphoria.

Today the market is in an unstable equilibrium point, the rising forces (rate cuts, AI, liquidity) are already widely valued, while the risks (evaluations, slowdown, geopolitics) remain understated. We must have discipline and prudence, we do not need to choose between • bull • bear • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • •

Investors are paying very dearly every dollar of profits, based on optimistic expectations of future growth. Such high valuations imply that any disappointment about profits or GDP can generate rapid corrections. The market has no margin for error and prices already reflect the best possible scenario.

As regards the ratio of real US GDP growth to the annual percentage change in profits per share of the S&P 500. We see how historically profits and GDP move strongly in a correlated way, when the economy slows down, also profits decrease.

However, since 2020 there has been an abnormal divergence whereby the profits of the S&P 500 have bounced violently after the pandemic, much more than GDP, thanks to extraordinary factors (tax incentives, liquidity, buyback, AI).In recent quarters, however, this difference is shrinking, profit growth is slowing down while GDP remains modest.

This divergence indicates that markets have gone beyond the real economy. If economic growth remains weak, profits will hardly be able to support such high assessments. Historically, when the gap between EPS and GDP widens too much, it almost always follows a realignment phase (i.e. profits and prices slowing down together).

So today the ratings are pulled and the bond between the market or fundamentals is fragile. As long as the narrative about falling rates and AI growth resists, the trend can hold, but if the profits do not confirm, the risk of correction increases in proportion to optimism.