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. See earnings chart shown below.
Moreover, corporate profits are up 40% in just the last five
years. After-tax corporate profits are at record levels, totaling
almost $2 trillion. And just how did U.S. corporations manage this
feat? As Tom Hudson of the Miami Herald put it, Since
2007, companies first focused on cutting costs to survive. Then they
concentrated on growing their businesses in ways that didnt
require significant investment. As
sales have rebounded from the depths of the recession, companies have seen
those dollars drop to their bottom lines. In other words, corporate profits have come largely
at the expense of wages.
To put into perspective the gap between soaring corporate profits and
wages, lets examine the following chart courtesy of Goldman
Sachs' David Kostin.
To understand the importance of corporate earnings to todays
economy, consider the following statement from a CNNMoney
accounted for 11.1% of the U.S. economy last quarter, compared with an
average of 8% during the previous economic expansion. Five years ago, the companies in
the S&P 500 stock index earned almost $83 per share. This year, those companies are expected
to earn more than $112 per share. This explains why the Federal Reserve
remains deeply committed to a loose money policy, which chiefly benefits
Of course, Wall Street doesnt
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. Its harmful to
your portfolio. It
keeps you out of the market when you should be in.
The immediate-term uptrend remains intact as defined by the relative
position of the 15-day moving average. The major indices remain above
the 15-day MA and have made late session reversals in the last two days
normally a sign of technical strength. The market has recently been caught in a trading
range between investors who are booking profits as the Dow and S&P flirt
with the 2007 highs and those who missed the rally and are looking to buy the
buyers are winning the latest battle.
Euro zone crisis isnt
While the U.S. financial market is still currently favorable,
investors should be on the lookout for storm clouds on the horizon in the
coming months. On Monday the president of Germanys Bundesbank, Jens Weidmann, said
there is "no indication euro foreign exchange is seriously
comments led to immediate strengthening of the euro currency which translated
into dollar weakness.
There was a troubling note to Weidmanns
statement, however. Theres an old saying: Official
denial is tantamount to tacit admission. In
other words, when a bureaucrat insists that a problem is either under control
or doesnt exist,
the problem is usually far greater than is being admitted. I cant
help thinking what my late friend and cycle mentor, Bud Kress, would say
about the euro zone crisis which everyone thinks has been solved
I strongly believe Bud would have said something along the lines of, The
euro crisis is a cancer which is only beginning to metastasize. Those are the exact words he
spoke to me concerning the U.S. credit crisis in 2007 and his words at that
time proved prescient. To
think that a problem which only a few months ago was threatening to engulf
Europe in its own version of the credit crisis has now suddenly been solved by
the confident pronouncements of a couple of central bankers is hard to
ECB may well be ready and willing to launch the monetary equivalent of a
bazooka at the euro zone debt problem, but history suggests the bank will be
seriously challenged before this crisis is over. To date there has been
no serious challenge.
If the Kress cycle echo forecast for
this year is correct, we should eventually see problems begin to manifest in
Europe later this year. As the second part of the year progresses and
we head closer to 2014 (when the 120-year cycle is scheduled to bottom), the
problems in Europe should spread overseas and envelope the global economy,
including the U.S. and China. As Kress used to say, The
cycles have a way of bringing out the dirty laundry of the nations. This time around should prove to
be no exception.
Date With Destiny
Take a journey into the future
with me as we discover what the future may unfold in the fateful period
leading up to and following the 120-year cycle bottom in late 2014.
Picking up where I left off in my
previous work, The Stock Market
Cycles, I expand on the Kress cycle narrative and explain how the
120-year Mega cycle influences the market, the economy and other aspects of
American life and culture. My latest book, 2014: Americas Date With Destiny, examines the most vital issues facing America and
the global economy in the 2-3 years ahead.
The new book explains that the
credit crisis of 2008 was merely the prelude in an intensifying global credit
storm. If the basis for my prediction continue true to form
namely the long-term Kress cycles the
worst part of the crisis lies ahead in the years 2013-2014. The book is now available for sale at:
Order today to receive your
autographed copy and a FREE 1-month trial subscription to the Momentum Strategies
Clif Droke is the editor of
the three times weekly Momentum Strategies Report newsletter, published since
1997, which covers U.S. equity markets and various stock sectors, natural
resources, money supply and bank credit trends, the dollar and the U.S.
economy. The forecasts are made using a unique proprietary blend of
analytical methods involving cycles, internal momentum and moving average
systems, as well as investor sentiment. He is also the author of
numerous books, including most recently 2014: Americas Date With Destiny. For more information visit www.clifdroke.com