Corporate Profits and Market Peaks - Are We There Yet?

Corporate profit data was released today for the second quarter, showing a broad-based rebound from the weather-induced weakness seen at the beginning of the year.

Here’s a chart showing eight different corporate profitability measures since 2009. I’ve added a dotted line to indicate the rebound from Q1 2014:

Source: FRED

Calls for a market top seem premature in light of increasing profits, low financial stress, and an ongoing improvement in U.S. economic data. That said, short to intermediate measures are signaling caution (see here and here).

Focusing on corporate profits, let’s look at how the following eight measures above correlate with major market tops and recessions over the past three business cycles.

2007 Market Peak

Peak in corporate profits: Q3 2006
Peak in S&P 500 (noted with a dotted line): Q4 (October) 2007
Recession: Q4 (December) 2007

Source: FRED

2000 Market Peak

Peak in corporate profits: Q3 1997
Peak in S&P 500 (dotted line): Q1 (March) 2000
Recession: Q1 (March) 2001

Source: FRED

1990 Market Peak

Peak in corporate profits: Q4 1988
Peak in S&P 500 (dotted line): Q3 (July) 1990
Recession: Q3 (July) 1990

Source: FRED

A few observations/remarks:

  • On average, the eight measures above peak in unison over a year before the S&P 500.
  • With 6 of the 8 current measures having hit new highs, arguments for a market peak based on corporate profits still appear premature.
  • Never use one indicator alone for assessing market conditions. Leading and real-time measures should always be used in conjunction for addressing possible trend changes.

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