Part Two: Problems with Profits
I.C. Angles Investment Post
Record corporate profits are this stock market’s feet of clay. And it’s just a matter of time until they crumble. Although the rise in stock prices most recently has come largely from stocks simply becoming more expensive, as discussed in part one of “This isn’t Going to End Well” rising corporate earnings are also playing a critical role. Counter intuitively, there are two key reasons record profits are actually bad for future stock market prices. First, profits are mean reverting. History, teaches that record high profits, eventually fall and revert to their arithmetic mean over time–an action that takes stock prices lower in the process. Second, rather than strong economic growth and innovations around productivity driving profitability higher, profit growth has been increasingly generated by wage suppression and financial engineering.