CORPORATE PROFITS WILL SOON COME UNDER DOWNWARD PRESSURE

CORPORATE PROFITS WILL SOON COME UNDER DOWNWARD PRESSURE

-- SOURCE: 09-11-18 CME Group, Bluford Putnam & Erik Norland - "The Next Recession: 3 Critical Warning Signs" --

Corporate profits are soon likely to come under downward pressure.

Falling corporate profits do not necessarily doom the equity bull market, at least in the short run. The previous two bull markets went through two phases. In the first phase (1990-1997 and 2003-2005), earnings and equity prices rose together. In the second phase (1997-2000 and 2006-2007), earnings fell but equity prices rose anyway (Figure 4).

Figure 4: Investors Might Not Care if Earnings Decline… At Least for a Year or Two.

Earnings essentially have plateaued since 2014, before being goosed up by the corporate tax cut.  With the tax cut impact fully priced into the market, earnings may begin to decline in the second half of 2018.

Even so, the actual peak in the equity market might not come until 2019, 2020 or later, depending on whether a recession materializes.