By Ben Leubsdorf and Theo Francis

Corporate profits continued to rebound last quarter alongside solid growth in the broader U.S. economy.

A key measure of after-tax earnings across U.S. corporations rose 5.2% in the third quarter from a year earlier, the Commerce Department reported Tuesday. That was the first annual increase since late 2014 and the strongest year-over-year growth since the fourth quarter of 2012.

Profit gains were reflected among large U.S. companies in most industry sectors as healthy consumer spending and other forces helped accelerate economic growth and set the stage for further expansion in the fourth quarter.

The U.S. is "the bright spot in the world right now,"Dow Chemical Co. Chief Financial Officer Howard Ungerleider told analysts Tuesday.

Third-quarter earnings gains were led by technology, utilities, basic materials, financial and consumer-discretionary companies, according to Thomson Reuters. Real estate, health care and financials showed the most improvement in revenue.

On Monday, health-insurance giant UnitedHealth Group Inc. provided 2017 profit projections that exceeded analyst expectations, while shoe-seller Foot Locker Inc. recently said third-quarter sales and profit rose compared with the prior year. Hormel Foods Corp., the maker of Spam and other meat products, posted record earnings for the 14th straight quarter, while Campbell Soup Co. said cost cuts generated higher profit even as demand slackened.

Tuesday's Commerce Department report also showed that gross domestic product, a broad measure of the goods and services produced across the economy, expanded at an inflation- and seasonally adjusted annual rate of 3.2% in the third quarter, the strongest growth in two years.

That was up from last month's estimate that output rose at a 2.9% pace in the third quarter and beat economists' expectations for a revision up to 3% growth. The latest reading was boosted by stronger consumer spending, though business investment came in weaker than earlier estimated.

"The U.S. economy is in good shape in the second half of 2016," said Gus Faucher, deputy chief economist at PNC Financial Services Group.

Corporate profits have been pressured in recent years by various forces including weak global growth, a strong dollar that damps demand for U.S. exports, and slumping commodity prices that battered the energy and agriculture sectors.

But business earnings have shown signs of stabilization this year as some of those headwinds faded. The Commerce Department said after-tax corporate profits, without inventory valuation or capital consumption adjustments, rose 3.5% in the third quarter from the prior period, their third consecutive quarterly increase.

"We had been anticipating a turnaround for profits as nominal growth picked up; but the firming, at least so far, looks more rapid and stronger than we had expected," J.P. Morgan Chase economist Daniel Silver said.

Business profits represented 9.1% of U.S. GDP in the third quarter, up from a recent low of 7.8% in late 2015 though down from the 10.2% average seen in 2012 through 2014.

Large publicly traded U.S. companies posted their biggest percentage gains in profit since late 2014 in the third quarter, according to Thomson Reuters. With nearly all S&P 500 index companies reporting results, profits were set to rise 4.2% from last year's third quarter. Sales were expected to increase 2.6%. The figures reflect actual earnings -- adjusted to exclude write-downs, restructurings and other items considered unusual -- for companies that have reported and analyst expectations for others.

Excluding the hard-hit energy sector, earnings would be up 7.9%, Thomson Reuters said. The energy sector was the worst performer, where profits are down 67% from third-quarter 2015 and revenue declined 14.7%.

Business investment remains a weak spot for the economy. One measure of capital expenditures, fixed nonresidential investment, rose at a weak 0.1% pace last quarter versus an earlier estimate of 1.2% growth. Business investment in structures rose more than earlier estimated, but growth in spending on intellectual-property products such as software and research and development was weaker than earlier thought, and spending on equipment declined more sharply than previously estimated.

U.S. economic growth accelerated in the third quarter following modest growth in late 2015 and early 2016. Output climbed 1.6% in the third quarter from a year earlier, up from annual growth of 1.3% in the second quarter.

Consumer spending, which accounts for more than two-thirds of U.S. economic output, rose at a 2.8% annual rate in the third quarter, according to Tuesday's report. That was up from an earlier estimate of 2.1% growth, though still a slowdown from the second quarter's robust 4.3% growth rate for household outlays.

Looking forward, economists expect continued growth in the final three months of 2016. Forecasting firm Macroeconomic Advisers on Tuesday projected GDP growth at a 1.9% annual rate in the fourth quarter.

Economic growth in the coming years could be boosted by fiscal stimulus, according to some forecasters. Republicans next year will control both Congress and the White House, and President-elect Donald Trump has said he hopes to enact an overhaul of the tax code and an infrastructure-investment program.

With unemployment hovering around5% for more than a year and long-sluggish U.S. inflation appearing to firm, the Fed is widely expected to raise short-term interest rates at its Dec. 13-14 meeting, barring unexpected developments in economic data or the financial markets. The central bank has held its benchmark federal-funds rate at a range of 0.25% to 0.50% since December 2015.

Write to Ben Leubsdorf at ben.leubsdorf@wsj.com and Theo Francis at theo.francis@wsj.com

(END) Dow Jones Newswires

November 29, 2016 19:33 ET (00:33 GMT)

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