A handful of readers wrote yesterday: “Corporate profits are rolling over!”, “Cris, it’s time to get the word out.”
It appears the source of all the alarm was an article that recently appeared at Business Insider, “Wall Street Declares the Great Profit Margin Boom Is Finally Over,” which showed the following chart as partial evidence:
Sources: Business Insider, FRED
First, why is this important? Well, as I’ve shown in the past, if you look at 60 years of data (8 complete business cycles) you’ll find that corporate profits typically peak over a year before the stock market and over two years before a recession.
Thus, with Business Insider’s bold declaration that the boom is now over, is it time to “get the word out” that a top is near as some readers have suggested?
I’m not so sure—here’s why.
The Business Insider chart above shows only two measures of corporate profits: one with and one without an adjustment. The claim is, by making the adjustment, some measures appear to be “rolling over.” This is what we call cherry picking.
If you go to the FRED database used for the chart above, there are at least eight ways to measure and adjust corporate profits. Let’s not cherry pick one or two and paint whatever picture we want, but look at all of them instead.
What do we see from the above? First, all eight measures move together in fairly close harmony; they typically peak and bottom all at the same time before major peaks and bottoms in the market. Second, of the eight listed, five are still headed higher while only three are lower. Collectively speaking, this argues against a peak and calls for a market top.
Note: This does not mean the market can’t correct or won’t correct from current levels given sentiment, geopolitical factors, or negative shocks. However, if you are trying to predict that we’re at a major market top or that this is a bubble and it’s about to burst, the odds are much more in your favor once corporate profits roll over. Until that happens and some of the other measures I’ve identified reverse, talk of a market top still seems premature.
