Analysis: How much is Fed aid to U.S. corporate profits worth?

Analysis: How much is Fed aid to U.S. corporate profits worth?

 Many on Wall Street believe the Federal Reserve's monetary policy is behind record corporate earnings and the stock market's surge to all-time highs this year.

But how much is a burning issue for investors who wonder how the economy and stocks will perform once the Fed eventually eases its buying of $85 billion a month in bonds and eventually allows short-term rates to climb.

Some believe the influence of the Fed's policy, known as quantitative easing, has been particularly important to the performance of the benchmark Standard & Poor's 500 Index (^GSPC).

"People underestimate the extent to which quantitative easing has benefited the S&P," said Robbert van Batenburg, director of market strategy at brokerage Newedge USA LLC in New York. He called the effect akin to "an athlete on steroids."

The Fed's effect on corporate earnings is difficult to quantify. Van Batenburg estimates that corporate savings on interest expense after rates fell to historic lows has accounted for about 47 percent of S&P 500 earnings growth since 2009.

At the end of 2009, quarterly earnings per share for the S&P 500 were less than $20, and companies in the index paid about $4 a share in interest, van Batenburg said. Now the S&P 500 is generating about $26.70 a share in quarterly earnings but pays just $1.50 a share in interest.

Analysis: How much is Fed aid to U.S. corporate profits worth?

Interest paid by U.S. businesses peaked in 2007 at $2.83 trillion, falling sharply from there to $1.34 trillion in 2011, the last year data is available, according to the St. Louis Fed.

Lower rates account for almost 40 percent of total profit growth, which does not include savings from lower leasing or rental costs because of the low rates, van Batenburg said.

"The result is that corporate America has seen a substantial decline in its cost of capital and it has greatly benefited its bottom line," van Batenburg said.

Higher borrowing costs aren't likely to bite in the near-term. Companies used the last few years to shift their debt loads further into the future, according to Morgan Stanley.

In December 2011, the heaviest volume of corporate loans was set to mature in 2014, 2016 and 2017. As of this June, most loans now mature in 2017, 2018 and 2019.

Not everyone believes the Fed is behind the profit surge.

"The real pickle here is that there is no way of knowing what interest rates would have been without Fed intervention," said Russell Price, senior economist at Ameriprise Financial Services Inc in Troy, Michigan.

Price believes earnings have benefited more from tax credits for research and development and favorable amortization and depreciation schedules. Corporate taxes paid to the federal government as a percentage of GDP has hovered around 1 percent since 2009, from more than 2 percent the prior four years.

Even though borrowing costs are down and net profit margins are at all-time highs, operating profitability has been falling. This suggests other factors have been eating into earnings.

Known as EBITDA margin, or earnings before interest, tax, depreciation and amortization divided by total revenue, operating profitability peaked at 25.6 percent in late 2007 and recently fell below 20 percent.