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.
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