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By New_Deal_democrat June 1, 2017 11:18 am
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Corporate profits may have peaked for this cycle

The first revisions our Q1 GDP got little attention last week's, but at least one number deserves taking note of: corporate profits, particularly as deflated by unit labor costs,failed to make a new high, and actually turned down a little:


Why is this. Important?  Because corporate profits as deflated by unit labor costs is one of the four long leading indicators identified by Prof. Geoffrey Moore, who was responsible for the hpublication of the Iindex of Leading Indicatos for several decades.

This makes the second of his four long leading indicators which appears to have hhpeajed for this cycle.  Corporate bonds prices probably peaked last July:

In fact mortgage rates have not made new lows since 2913:

One of the two remaining long leading indicators, real M2 money supply, has decelerated substantially in the past 9 months, although it is still positive:

Housing permits last made a high 4 months ago, although there is no sign of any change in trend at this time:

For what it is worth, another reliable  long leading indicator, at least since the 1950s, the yield curve, has narrowed somewhat, although it is far from inverting:

If we get another decent employment report on Friday, the Fed certainly appears to have signaled that another rate hike is in the offing on Jnue, which will probably compress the yield curve further.

Finally, let's update the relationship between corporate profits and stock prices. The theory is that since the former is a long leading indicator and the latter a short leading indicator, averaged quarterly stock prices should follow in the *direction* of corporate profits. Here's what that looks like through Q1 of this year:

This relationship makes it look like there is not a lot of upside potential in stock prices, at least as measured quarterly. Moreover, if corporate profits have peaked for this cycle, then it would be expected that a cycle peak in stock prices in the next 12 months is a pretty good bet.

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