Over the past two years, the drive to cut costs has generated rapid productivity gains, and this greater efficiency has boosted corporate profits despite tepid revenue growth. Profits at Standard & Poor’s 500 corporations grew almost 6 percent in 2002 from depressed 2001 levels and have increased another 10 percent in the first half of this year.
Although this growth has been somewhat unevenly distributed across sectors, large-firm profits in the  2  BIS Review 43/2003  aggregate are now up smartly. Profits at smaller firms, which had fallen more precipitously, also appear to have rebounded sharply. Third, risk premiums have fallen substantially this year as corporate governance scandals are less notable and investor sentiment has turned favorable.