Stocks’ Greatest Friend Might Have Climbed Too Far Ahead Of Trend

Stocks’ Greatest Friend Might Have Climbed Too Far Ahead Of Trend
Andrew Rummer

about 2 years ago1 min

Mentioned in story

Company profits have roared back from the coronavirus shock over the past 18 months, helping​​ support the price investors are willing to pay for stocks. But history suggests the profit rebound will struggle to continue for much longer.  

Over the very long term, earnings at companies in the benchmark S&P 500 have risen at a consistent 6.5% a year, as indicated by the diagonal purple line on the chart above. S&P 500 earnings are currently 20% above that long-term trend, a level that has consistently proven unsustainable in the past.

This data is backed up by observations from the current earrings season. As we approach the halfway point of US earnings season, Bloomberg data shows that 76% of the 198 S&P 500 members to have reported so far have beaten analysts’ profit estimates. While that’s nothing to sniff at, it’s a clear step down from last quarter, when an awesome 82% topped expectations.

It’s possible the best days of the profit renaissance are behind us, particularly if booming inflation encourages workers to press their employers for bigger pay bumps. Any slowdown in profit growth would reduce the attractiveness of stocks as an investment and prove a drag on a US stock market that’s already dropped 5% this year. 



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