While the record corporate profit bonanza (if now declining [6]) is still the fallback argument for any bearish allegation that the only reason why the market is up 20% in 3 months is due to $2 trillion in liquidity dumped into markets by central banks, this may be about to end quite abruptly, especially if Europe is a harbinger of things to come. As the following chart from Credit Suisse shows, the number of large companies (>500bn market cap) that lose money on an LTM basis (so not just in the quarter, and thus with a much longer lasting effect) has risen in Q4 for the first time since Q3 2009. And while in nominal terms the change is still relatively modest, the actual change in "losing companies" is a doubling from under 5% to 10%, as for the first time in years the percentage of European money losing companies matches that of the US.
Since economic decoupling, while completely flawed, can last as long as recently printed money makes its way to the "hottest" markets on the margin, in this case the US, corporate decoupling as a theory is just to naive to even propose. At best the US will be hit with precisely the same lag that David Rosenberg mentioned in early January. The reason for the corporate profitability deterioration: surging input costs courtesy of the recent commodity spike. In other words, the only upside case for stocks, as their earnings are about to turn far more negative is multiple expansion. The same "multiple expansion" that will likely prove to be the same mirage as decoupling once the market digests what David Rosenberg discussed just yesterday [7]in the context of the tax shock already unleashed by the administration.
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