Although corporate profits have fallen off a cliff in recent quarters, the market has remained rather bullish. The red line is a measure of non-financial profits. Profits are the mothers milk of future stock prices. Profits always lead stock performance. The stock market is either pricing in a sharp recovery in corporate profits or the market is underestimating the future weakness of profits. Based on the slowing global growth and the stagnant US economy I would venture to guess that the market currently has this one dead wrong and is likely to see lower levels in the coming months.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.