Chris Puplava: Corporate profits are now higher than they’ve ever been before!
At first glance, this might seem like a good thing; except, here’s the problem: whenever profit margins reach a high, they often peak and then dramatically crash before the stock market and economy follow in like manner.
When Business Insider asked Wall Street’s best and brightest to produce what they considered to be “the most important charts of the year,” Blackstone’s Vice Chairman, Byron Wein, sent the following and said, “This chart worries me. Profit margins are at a peak and they appear to be rolling over. This could mean trouble…”
MarketWatch’s Mark Hulbert similarly warned in August of last year that with profit margins at record highs, any sizeable decline “would almost certainly translate into big losses for the stock market.”
With many analysts and well-known commentators raising the alarm, a number of our followers have asked us to comment.
Here are a number of observations and conclusions by analyzing sixty years of data corresponding to corporate profit margins, the stock market (using the S&P 500), and recessions (see chart below for reference):
- Corporate profit margins can remain at elevated levels anywhere from a single quarter to multiple years and don’t typically present an imminent warning threat to the stock market or economy until forming a major peak and sudden decline.