ORLANDO, Florida, June 2 (Reuters) - Headwinds from

tariffs, bond yields and 'stagflation' are gathering force, but

corporate America could not be in better shape to face the

economic storm that may be building.

Data released last week showed that U.S. pre-tax corporate

profits fell $118.1 billion, or 2.9%, in the first quarter, the

fastest pace since 2020, suggesting companies are feeling the

pinch from tariffs even before they've properly started to bite.

After-tax profits fell 3.6%.

But any sense of alarm should be mitigated by the fact that

profits surged $205 billion, or 5.4%, the three months before.

The decline in the January-March period was simply normalization

on the back of a bumper quarter.

And on a year-on-year basis, profits were up more than 5%.

True, the next few quarters could get messy. If growth slows

or inflation starts to rise, corporate margins could get

squeezed, consumers may curb spending and companies could find

themselves with limited pricing power.

But zoom out, and the bigger picture suggests corporate

America has rarely been stronger.

Depending on how you slice and dice the figures, corporate

profits as a share of national output or income are still

extraordinarily high. In some cases, they're close to the

highest on record.

Consider pre-tax profits with inventory valuation and

capital consumption adjustments. These fell slightly to 13.0% of

GDP in the first quarter of this year, on a seasonally-adjusted

annual basis, but that was from a record 13.5% in the

September-December period.

After-tax profits dipped to 12% of GDP from 12.2% in the

final quarter of last year. Again, that was a small decline, and

it leaves after-tax profits still near the all-time peak of

12.8% of GDP recorded in the second quarter of 2021. The average

over the past 75 years is less than 7.5% of GDP.

To paraphrase former British Prime Minister Harold

Macmillan, corporate America has never had it so good. Which is

just as well, because headwinds are gathering.

DOMESTIC VS 'ROW'

One can debate how much any of the number of brewing risks

will land on the real economy, but companies could certainly

feel some pain if they end up facing the collective punch of

tariffs, weakening consumer demand, diminishing pricing power

and higher-for-longer interest rates.

"An increasingly fragmented environment means diverging

trends across economies. It's an environment ... that will

constrain profits at home and around the world," says Gregory

Daco, chief economist at EY-Parthenon.

Tariffs and protectionism will put the squeeze on global

supply chains and overall trade. It will be interesting to

observe how the divergence between domestically-generated

profits and earnings accrued from the rest of the world (RoW)

plays out in this environment.

Domestic profits account for the majority of total income,

of course, but that share has exploded recently. Or looked at

the other way, the share of profits from abroad has plunged. If

Trump's trade war succeeds in prompting U.S. companies to bring

more production back home, the 'RoW' footprint may shrink

further.

In the fourth quarter of 2019, just before the pandemic,

domestically-generated profits were around 75% of the $2.13

trillion total, on a seasonally-adjusted annual basis, and 'RoW'

profits accounted for a quarter. In the first three months of

this year, domestic profits accounted for 87.5% of the total,

and the share of profits from abroad had halved to 12.5%.

Corporate profitability is being tested. The aggregate

second quarter earnings growth forecast for S&P 500 companies

stands at 5.5%, according to LSEG I/B/E/S, down from 10.2% two

months ago. The 2025 calendar year earnings growth forecast has

shrunk to 8.3% today from 14.0% at the start of the year.

The challenges are mounting, but corporate America can face

them from a position of strength.

(The opinions expressed here are those of the author, a

columnist for Reuters)