The idea that the federal government’s $1 trillion-plus annual budget deficit is lifting corporate profits seems more than a bit counterintuitive.

But that’s what a particular earnings theory, known as Kalecki’s profits equation, indicates, says Neel Kashkari, head of global equities for money management firm Pimco.

“Some investors have used the Kalecki profits equation to break corporate profits into its fundamental macroeconomic elements, specifically: profits = investment – household savings – government savings – foreign savings + dividends,” Kashkari writes in his monthly commentary.

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“From this equation, investors can see that corporate profits have expanded to such a large share of GDP due to large government deficits.”

So what would be the implications of a shrinking deficit? “If the government implemented a deficit reduction plan, corporate profits could suffer,” Kashkari writes.

But ultimately, profits would recover, as “such a scenario would almost certainly be a net positive for confidence in our economic and political systems and provide a strong tailwind to economic activity,” he says.

“It is hard to see corporate profits, or stock prices, falling because of long-term fiscal discipline.”

But stock analysts certainly aren’t expecting strong first-quarter earnings reports in coming days.

Analysts surveyed by Bloomberg forecast earnings at Standard & Poor’s 500 Index companies, excluding financials, will rise only 0.6 percent in the first and second quarters from a year earlier. Those would be the weakest gains since 2009.

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