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1 year ago
- Corporate Profits increase during an economic expansion (as expected)
- The stock market does not increase on current earnings, but rather expected earnings
- However the analyst community is generally very bad at forecasting earnings at tops and bottoms, they tend to lag the earnings cycle. By this I mean that they are, as a community, too pessimistic at bottoms and too optimistic at tops
- Corporate profit margins and corporate earnings tend to peak out *before* the stock market peak, as the analyst community is still forecasting earnings growth when the fundamentals have already begun deteriorating
- This is a key divergence that has happened at many market tops and is a catalyst for a market correction (usually a major one)
- Since the 1960s, the sequence has been for corporate profit margins to peak, which sets up deteriorating fundamentals, which sets up an stock market peak. This typically occurs with deteriorating fundamentals in the broader economy and happens in conjunction with a recession.