Guest Post: What If Corporate Earnings Have Topped Out?

Tyler Durden's picture

Via Charles Hugh-Smith of OfTwoMinds blog,

The market may have reached cyclical highs in corporate earnings. That does not bode well for additional stock market advances.

If corporate earnings have topped out, what will push the stock market higher?The usual answer is "central bank intervention," but history suggests that in the long run, the market eventually correlates to corporate earnings. Earnings up, market up; earnings down, market down.
Frequent contributor B.C. recently shared some insightful charts of S&P 500 (SPX) earnings. Here are B.C.'s comments on the first chart:

Note that real earnings (CPI adjusted) in '09 fell to the levels of the 1920s-30s, 1890s, and 1870s, and to the levels of the 1970s in nominal terms. A "typical" cyclical decline would take earnings back to the long-term trend from 1932 and the log trend line at $40s-$50s from $87 today. 

Also, recall that the Fortune 300 firms have revenues equivalent to 50% to 100% of private GDP at $425,000/employee, so they are the economy. A decline of 50% for profits would be the equivalent of 10% of private GDP, which would match or exceed the decline in '08-'09, risking an increase in the Unemployment rate of 50-100% and a fiscal deficit exceeding 100% of tax receipts after Social Security and Medicare receipts.

The next two charts track long-term historic trends: here is B.C.'s commentary:

Reported earnings of the S&P 500 (SPX) are highly cyclical with a periodicity of ~51 months. Earnings are contracting year-over-year (yoy) as occurred in late '07 and early '08, early '01, etc. Profits as a percentage of GDP at 10-11% are 65-70% above the historical average and 130% above the historical average during recessions and bear market troughs, implying the risk of up to a 55-60% decline in profits and profits as a percentage of GDP, i.e., a roughly $1 trillion decline or an equivalent of 10% of private GDP.
The 10-yr. average P/E and 16- and 20-year real changes and real total returns to date for the secular bear market imply the risk of a crash at some point in the next 1/2 to 4 years and no real change to the S&P 500 for 20 years, indicating just how grossly overvalued stock prices are historically.

Thank you, B.C. for the charts and incisive commentary. Is it mere coincidence that the SPX has doubled over the past four years as corporate profits soared? If we haven't yet reached the 51-month cycle peak, we are certainly close. What happens to the post-QE market if earnings decline?

4th Quarter Earnings Will be an Unmitigated Disaster (EconMatters)

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greyghost's picture

does anything this clown writes really matter? maybe the fact that "TIDE" is being used as currency is what matters. yep, ghetto currency.  now that is the true state of affairs in modern america.

buzzsaw99's picture

What happens to the post-QE...


LawsofPhysics's picture

LMFAO!!  Simple, the corporations will change the accounting rules regarding how things like "profit" and "earnings" are defined.  Shit, they own your representation.  "Mark to fantasy" forever!  Well at least until the supply lines break.  hedge accordingly.

CPL's picture

With WTI racing up to 100...I would put a definate, positively, absolute maybe.

Gypsyducks's picture

Someone is rabidly defending their long WTI position as we speak....

CPL's picture

Trying to, but the idiots have printed too fast to control commodities prices anymore.  It's poked over 100 six times in the last five years.  Every time, market shits the bed.


Price per barrel drops.  Pump price does not though.

LawsofPhysics's picture

All eCONomies are local.  Fuel is under $3.00 per gallon in Utah, a state with many refineries, lots of natural resources, no property taxes, and relatively few regulations. If the "idiots" around you aren't on the same page, move before they demand the fruit of your labor (because eventually they will).

NickelthroweR's picture


I'm out in the Suburbs of Salt Lake City visiting family from my usual haunts of S. California.  The difference between the two locations is Night and Day.  What shocked me most was the fact that I see homes and businesses being built and I see help wanted signs in the stores.

You are also correct in that a gallon of gas is under $3 which is not true for California.  I've tried to put my finger on it but I do not know enough about how this State is organized to fully understand why things are not as equally bad here.  Didn't know about the property tax part.  Was that something the Mormons demanded?

LawsofPhysics's picture

Mormons are tough and industrious they also stick together (very monocultural) and take care of their own.  They are very familiar with governments physically jailing people and stealing their assets.  Most are only two generations removed from the polygamists who where killed or physically chased out of Minnesota.  Later, most were jailed and their assets stolen by the feds in Utah.  While the vast majority recognize that polygamy is a bad thing in modern culture, they understand all to well what the Federal government is capable of.  They also understand what it takes to survive in a harsh environment.  I'd prefer a mormon neighbor over a baptist or catholic neighbor any day.


If a person makes land productive and is using that productivity to grow food and survive, taxing that person's land is diminishing their chances of survival.  A morally wrong and corrupt idea on so many levels.  I have had property in Utah for 20+ years.  My problem with most californians moving in is that they still suffer from massive cognative dissonance and now wnat to turn the state into california because the miss certain "conveniences" and the "easy money". Be very careful what you wish for folks.

Shizzmoney's picture

Corporate executives and CFO's will just buyback more of their stock. 

When in doubt, exploit, plunder, and baffle with bullshit.

AccreditedEYE's picture

Do earnings even matter anymore? Seriously. Just buy. (Getting a nice dip to purchase right here BTW)

yogibear's picture

It will be amusing to see the fear on the Fed's faces when all those dollars abroad come back to the US and dollar dumping occurs.

The Federal Reserve banksters have to keep purchasing debt and monetizing.

Debt increases to $20 plus trillion in the next 4 years. The noose on the Fed's neck is tightening.



LawsofPhysics's picture

The optimisim is appreciated.

HurricaneSeason's picture

I don't really think it's optimism as much as total faith in the abilities and morals of our leaders.

LawsofPhysics's picture

"total faith in the abilities and morals of our leaders."  - LMFAO!!!  Right, because they have been so "moral" so far.  Remind us, where is that bundler of Obama's, John Corzine?  We know the money and assets went to J.P. Morgan and GS.  Has he been prosecuted?  Will he be convicted?    No, he is considering starting a hedge fund so he can increase his personal wealth even more.

To believe that any of your "representation" or "leadership" has any kind of morals or ethics is optimistic indeed.

ejmoosa's picture

What if? 

The rate of year over year profit growth is now down to 7.87%.  One year ago that number was 20%.

And the numbers appear higher now because corporations stopped hiring and put the brakes on capital investments because they saw what was coming this time.


Inthemix96's picture

What happens post QE?

It all turns into National Lampoons Christmas Vacation time and we live happily ever after.  Which reminds me, I met this hagard old wife at the market this morning and for some unknown reason I had the urge to swap my prize cow for a handful of funny looking beans off her.  I'm off to plant them now, I am sure I will keep you all informed as to what grows.

HurricaneSeason's picture

Use miracle grow and hydroponics and a good ventilation system and you shouldn't have any problem.

Racer's picture

It's different this time... Central Bwanksters meddling all the time in the 'market'

rsnoble's picture

If this market isn't topped out i'll be a monkeys uncle.  The 3rd wave is in, Nasdaq 3100 is here no amount of manipulation is going to stop what comes.  The only manipulation that will work is just unplugging it and displaying DOW13k everyday.  This motherfucker is finished. Pray they aren't able to get our guns before hell arrives.  How long they can keep this fucking POS hoovering at these nosebleed levels is not known but it's becoming harder everyday. 

Rainman's picture

Moar better earnings = moar unsustainable debt for the muppets. Obamanomics 101.

yogibear's picture

Payroll taxes go up again with FICA. Less money. And all the other taxes go up as well. Debt and deficits start hitting home. Unless the treasury with the help of Bernanke and the Fed printing  out $100,000/person checks, reality starts hitting the masses.

Property taxes keep increasing to pay for bloated public pension promises.

disabledvet's picture

The "usual answer" is in fact an economic recovery not a bunch of b.s. from the Fed. And if we look at profits we can indeed see there is/was a cyclical recovery. To be taken seriously the author must first acknowledge this simple fact...then his argument might make sense that "the recovery grows long in tooth therefore profits will sag." Moreso since no one argues the Fee can be any looser nor the Federal Government any more profligate. Of course this is usually the sweet spot for large cap growth since inflation will moderate, credit becomes more available and so long as growth in the economy is sustained the value of said profits move higher. This is however "the New Normal" and small caps have not rallied as they should nor has the economy recovered as it ought. FOR EXAMPLE energy inventories are at ALL TIME record highs. I would argue as a consequence those trading the commodity space "beware." I would also argue if you haven't been able to take advantage of this cyclical move "you're fired." (that would be long everything pretty much) because if you haven't made a dime the last three years or worse LOST money (which is quite common in bull markets) then you certainly aren't going to do well as the "challenging times" hit. Word is Boards have become highly assertive of late as the luster of "rock star CEO's" fades. Simply put this is a "blocking and tackling" recovery where people who do their homework seem to be far outperforming those just "going through the motions." that ESPECIALLY includes people in the media which when not missing this recovery completely have completely said the wrong thing as their "bailout."

rsnoble's picture

Of course the only problem with topped out earnings is now it's in the mainstream media.  It's not hard to break out the massive eraser set and create an environment of 'not as bad as expected' and attempt to further the delusion. 

MFLTucson's picture


Doesn’t matter if there are earnings at all. This stock market has not traded on ANY fundamentals since 2008, it is driven by fraud and deception and the evil hand of Ben Bernanke to suck people in for the slaughter. This is all about money printing and an allusion of a “recovery” (remember the green shoots bullshit?) which has not and does not exist.

HurricaneSeason's picture

I'd rather read tea leaves or toss chicken bones than believe a correlation of this earnings crap.

JR's picture

The bankers, creating money out of nothing, “have purchased secret open control of almost every large corporation in America.” -- Sheldon Emry

Harboring no loyalty to the working man or to America but only to their profits from slave wages, these international banking families have plowed under America’s consumer base.

A captured money system that nationalizes oppression, that off-shores at will America’s industrial production capacity to meet its material requirements, can no more support prosperity, corporate “profits,” than Stalin’s nationalized oppression. Western civilization is on the line.

One hundred years of the Federal Reserve System has destroyed the value of America’s currency and her people’s assets while continuing to gouge them for nondiscretionary necessities and government costs such as public sector pensions.

The result is that America is swindling its own people by, as Hazlitt put it, “printing a chronically depreciating paper currency.”

“At the same time that they [the bankers] encourage more consumer spending,” he wrote, “they pile up further disincentives and penalties in the way of saving and investment. Their chief method of doing this…is to embark on or accelerate inflation.”

“The key to their wealth and power over us is their ability to create ‘money’ out of nothing and lend it to us at interest.”

Their Goal: To erect a complete economic and political colossus over the nation, aka slavery.

SheepDog-One's picture

Earnings schmernings...when do the Central Banksters pull the rug out again? That's the only relevant question here with 'markets' within 5% of all-time record megabubble highs.

uncle reggie's picture

In this wonderful age of lies, deceit and gross manipulation, earnings dont mean shit. Sautee the numbers, crank up the propaganda machine and everything will be just peachy. And the band plays on...

rsnoble's picture

Actual yes, this market has traded on nothing but fundementals in a macro view. Give banks billions, they buy stocks, bingo.  LOL.  That's like this fucking retard in town I know that's on his 4th or 5th business that I know of. Bankrupts one after another because he's an idiot and his rich mama hands him another bag of cash.  Sad thing is I think he just does it so people will think of him as some big bad business owner. LOL.  Shoulda just kept the money and bought bling and went to strip clubs you fkn dork woulda been a lot cheaper and probably get laid more than you do running your dildo cleaning service or wtf it is that you do now. I don't like the guy.  Neither does anyone else. Hmmm....maybe that's his problem?

SmoothCoolSmoke's picture

Profits peaked.  AA says no way.

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