By Justin Lahart 

Companies say profits are doing great. U.S. government bean counters have a more dour take. The differences in those two assessments reflect an environment where it isn't America, but the rest of the world, that is driving earnings growth.

Earnings per share at companies in the S&P 500 were strong in the first quarter, rising 15.3% above their year earlier level, according to Thomson Reuters I/B/E/S. That counts as the strongest growth in nearly six years. But on Friday, alongside its revisions to gross domestic product, the Commerce Department reported that adjusted after-tax corporate profits were up just 4.3% from a year earlier.

The S&P 500 and Commerce Department profit numbers are hardly apples to apples. The S&P figures represent 500 large public companies, while the Commerce Department is trying to count everything from Apple to the local dry cleaner. The earnings that companies highlight, and that investors tend to focus on, often exclude charges for "one-time" items such as layoffs, while the Commerce Department figures are closer to earnings under generally accepted accounting principles. The payment of legal settlements, including an environmental-regulation penalty for auto maker Volkswagen, weighed on the Commerce Department figures. And the Commerce Department makes adjustments to exclude gains and losses that result from changes in the values of companies' inventory.

What Friday's data does show is that profit growth for U.S. companies is far stronger overseas than at home. That could affect corporate spending and strategy.

The Commerce Department said that what it calls rest-of-the-world profits rose 25% in the first quarter from a year earlier. These profits are based on the receipts companies are getting from abroad -- for exports, for example -- less the payments they send to other countries.

This number matters because it shows just how strong U.S. companies' overseas earnings are. And it breaks down the source of earnings in a way that doesn't show up in the S&P 500 figures. Because it doesn't count all the profits from U.S. companies' overseas units, the government numbers understate overseas earnings, which is one reason why overall S&P figures look stronger.

For investors there is bad news and good news here.

The bad news is that domestic U.S. profit growth is slowing. Take away the rest-of-the-world profits, and the Commerce Department figures show domestic after-tax profits were down slightly from a year ago, and well off their 2014 peak. That's a reflection of how rising costs for labor in combination with a slow-growing U.S. economy are grinding down profit margins.

The good news is that companies' overseas operations have taken the baton, and ought to be able to keep running with it for a while. Economic growth in places like Europe is stronger and emerging markets are looking a lot steadier lately.

Global growth is a positive for the U.S. But if the trends continue, it could have a long-term impact because companies are more likely to invest where there is growth, and, for now, that is overseas.

Write to Justin Lahart at justin.lahart@wsj.com

(END) Dow Jones Newswires

May 26, 2017 13:43 ET (17:43 GMT)

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