The Market Can Rally Past Profits

Over at Bloomberg, Lu Wang notes that the market can and has rallied past its peak profitability:

Even if corporate profitability peaked today in the U.S., the market would rally for another year.

That’s the finding of Jason Trennert, the chief investment strategist at Strategas Research Partners in New York, who studied the relationship between equities and earnings margins since 1949. On average, the peak in profit margins came four quarters before the market’s top, the study shows.

(…)

Thanks to near-record low interest rates, stagnant pay and more than $2 trillion of share buybacks, chief executive officers have increased profit by an average 15 percent a year since 2009, three times faster than sales.

Operating margins for S&P 500 companies, the difference between revenue and expenses, climbed to a record 10.1 percent in the third quarter of 2014 and probably slipped to 9 percent in the final three months, data compiled by S&P Dow Jones Indices show.

Profit margins peaked in September 2006 during the last bull market, four quarters before the S&P 500 reached an all-time high in October 2007, data compiled by Strategas show. The equity gauge’s record in March 2000 came 10 quarters after corporate profitability hit a high. The shortest gap occurred in 1973, when there was only one quarter between peaks of margins and the market.

“I’d follow the trend of margins,” Trennert said. “They’re not noisy and there are clear cycles.”

Posted by on March 10th, 2015 at 11:17 am


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