Corporate Profits and Market Peaks - Are We There Yet?
Cris Sheridan | Sep 28, 2014 07:05AM ET
Corporate profit data was released Friday for the second quarter, showing a broad-based rebound from the weather-induced weakness seen at the beginning of the year.
Here’s a chart showing eight different corporate profitability measures since 2009. I’ve added a dotted line to indicate the rebound from Q1 2014:
Source: FRED
Calls for a market top seem premature in light of increasing profits, low financial stress, and an ongoing improvement in U.S. economic data. That said, short to intermediate measures are signaling caution (see here ).
Focusing on corporate profits, let’s look at how the following eight measures above correlate with major market tops and recessions over the past three business cycles.
h3 2007 Market Peak/h3- Peak in corporate profits: Q3 2006
- Peak in S&P 500 (noted with a dotted line): Q4 (October) 2007
- Recession: Q4 (December) 2007
Source: FRED
h3 2000 Market Peak/h3- Peak in corporate profits: Q3 1997
- Peak in S&P 500 (dotted line): Q1 (March) 2000
- Recession: Q1 (March) 2001
Source: FREDh3 1990 Market Peak/h3
- Peak in corporate profits: Q4 1988
- Peak in S&P 500 (dotted line): Q3 (July) 1990
- Recession: Q3 (July) 1990
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A few observations/remarks:
- On average, the eight measures above peak in unison over a year before the S&P 500.
- With 6 of the 8 current measures having hit new highs, arguments for a market peak based on corporate profits still appear premature.
- Never use one indicator alone for assessing market conditions. Leading and real-time measures should always be used in conjunction for addressing possible trend changes.
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