Wednesday, February 6, 2013

Forget the economy -- it's all about corporate profits

Many investors are wondering what has been behind the relentless rally in stock prices.  Look no further than corporate profits.

Consider that in the third quarter of 2013, corporate earnings were $1.75 trillion, up 18.6% from a year ago. That took after-tax profits to their greatest percentage of GDP in history.  For the most recent quarter, earnings for S&P 500 companies are estimated to have risen 4.7 percent, above a 1.9 percent forecast at the start of the earnings season.

Moreover, corporate profits are up 40% in just the last five years.  After-tax corporate profits are at record levels, totaling almost $2 trillion.  Real wages, meanwhile, are declining.

Of course, Wall Street doesn’t care about wages.  Rising profits are the main concern at the end of the day, and as long as the profit rally continues, investors will have reason to enough to remain bullish during the rest of the earnings season (i.e. until late February).  When it comes to evaluating the disparity between strong corporate profits and a still-tepid job market, it will do us well to remember the maxim of market analyst Steve Todd, who said: “Record earnings are behind the market rally. Looking at the economy is worse than useless.  It’s harmful to your portfolio.  It keeps you out of the market when you should be in.”

[Excerpted from the Feb. 6 issue of Momentum Strategies Report,]

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