As Larry Kudlow likes to say Corporate Profits are "the Mother's Milk of stocks, business success and job creation." Corporate Profits reported in the GDP Report tend to lead reported corporate profits of companies in the S&P 500 by 2 quarters. With the potential peak in Corporate Profits for the GDP report, S&P 500 earnings may be about to peak as well.
Trouble could be brewing. The stock market tends to peak after the peak in corporate profits. The timing is uncertain as the stock market peak follows with an uncertain lag. It took three years from the 1997 peak in profits to the 2000 peak in stocks while it only took one year from the 2006 peak in profits to the 2007 peak in the stock market.
Once Stocks peak, given a peak in corporate profits, then a recession is usually just around the corner. If the peak in Corporate Profits is confirmed over the next two quarters, the Stock Market - and the whole economy - will enter a much more fragile stage of the economic cycle.
I am skeptical that the current expansion is about to fall apart of its own accord, but the dual uncertainty of tax increases on the table for the end of 2012 and the pending implemenation of Obamacare have caused a certain amount of investment and hiring to be pushed back by Corporate America. A potentially strong expansion based on Corporate Profitability has been turned into the weakest recovery outside of the Great Depression. The upcoming U.S. Elections will be crucial for relieving economic uncertainty and I expect many months of choppy performance in the markets as uncertainty reigns.
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