What If Corporate Earnings Have Topped Out? (January 8, 2013)
The market may have reached cyclical highs in corporate earnings. That does not bode well for additional stock market advances.
If corporate earnings have topped out, what will push the stock market higher? The usual answer is "central bank intervention," but history suggests that in the long run, the market eventually correlates to corporate earnings. Earnings up, market up; earnings down, market down.
Frequent contributor B.C. recently shared some insightful charts of S&P 500 (SPX) earnings. Here are B.C.'s comments on the first chart:
Note that real earnings (CPI adjusted) in '09 fell to the levels of the 1920s-30s, 1890s, and 1870s, and to the levels of the 1970s in nominal terms. A "typical" cyclical decline would take earnings back to the long-term trend from 1932 and the log trend line at $40s-$50s from $87 today.
The next two charts track long-term historic trends: here is B.C.'s commentary:
Reported earnings of the S&P 500 (SPX) are highly cyclical with a periodicity of ~51 months. Earnings are contracting year-over-year (yoy) as occurred in late '07 and early '08, early '01, etc.
Thank you, B.C. for the charts and incisive commentary. Is it mere coincidence that the SPX has doubled over the past four years as corporate profits soared? If we haven't yet reached the 51-month cycle peak, we are certainly close. What happens to the post-QE market if earnings decline?
4th Quarter Earnings Will be an Unmitigated Disaster (EconMatters)
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