Investment platform The Share Centre’s Profit Watch UK showed that pre-tax profit across UK plc grew by 4.4% during the first quarter of the year.

While this represents the tenth successive quarter of profit growth, the positive headline figure can be attributed to the 40 largest listed UK companies which experienced average growth of 11.2%. This group includes well-known blue chip names, such as HSBC, Diageo and GlaxoSmithKline.

Outside of this group, small and medium-sized businesses struggled during the first three months of the year – with profits down by an average of 17.6%, representing the fourth quarter of declining profits in this category.

Almost half of companies outside of the top 40 saw profits fall year-on-year, compared to a quarter of those in the super-league. Out of the 20 sectors that The Share Centre tracks, 11 saw profits fall – with asset managers, industrials and general retailers taking big hits.

Richard Stone, chief executive of The Share Centre, noted that the drop in profits outside of the top 40 was exaggerated by big losses at a handful of companies.

“Sharp declines in profit like those in the latest quarter are unlikely to repeat in our view, but there is work to be done to reverse the margin squeeze being felt across a number of sectors. This narrowing of profit growth to fewer and fewer companies is common late in the economic cycle,” he explained.

Banks bounce back

Across the 40 largest companies, banking profits jumped by close to three quarters – with Lloyds, Barclays and HSBC experiencing a sharp rise in earnings. The Share Centre noted that the painful drag of regulatory fines and other costs relating to the financial crisis is finally starting to wear off.

The oil sector also performed well: the likes of BP, Shell and smaller players saw pre-tax income rise by two thirds. Meanwhile, mining giants saw pre-tax income increase by 18%. The mining sector contributed one fifth of all profits across UK plc, which contrasts with two years ago when it was posting losses.

Revenues across UK plc grew by 8% during the first quarter, buoyed by contributions from the oil, mining, building materials and construction sectors.

The Share Centre noted that once again the contribution to this headline figure from the 40 largest listed companies was disproportionate. While these businesses saw margins expand, those outside of the ‘super-league’ experienced a squeeze on margins.

The Share Centre’s index of UK revenues rose to a record 163.7, which indicates that British companies have grown revenues by close to two thirds since 2007.

Over the last 12 months, listed companies generated record sales of £2.05tn, representing an 8.1% increase year-on-year. During the same timeframe, they turned a profit of £192.2bn on those sales.

Forecasts lowered

The findings indicate that analysts have been too optimistic in their outlook for earnings in recent months and have steadily reduced forecasts as time has passed. Nine months ago, they expected median earnings growth of 6.7% for 2018/19, but have now cut their expectations to 4%, in line with the performance in the current earnings season.

Next year, they expect profits to grow by 8.3%. This is lower than the previous estimate of 9.6%. However, The Share Centre believes this is still too high, given that the recent engines of UK profit growth are now running at a slower pace.

In spite of this, Stone believes that UK shares offer good value compared to historical levels and to other markets around the world.