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By New_Deal_democrat April 8, 2015 1:10 pm
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Corporate profts lead the stock market: update

This is an update on a comparison I have made previously.  Since corporate profits are a long leading indicator for the economy, and the stock market is a short leading indicator, it stands to reason that, contrary to common wisdom, reported corporate profits lead the stock market, not visa versa.

Since we have finished the first quarter, let's update this relationship.  As in the past, I am not concerned with the daily fluctuations of the stock market, but rather its quarterly average. Here is the YoY% change in the S&P 500 (blue) vs. corporate profits (red):

Since late 2012, the stock market has shown much more growth than corporate profits.  Another way of putting this is to say that the p/e multiple increased.

Now here is the quarterly change:

Should corporate profits have declined in the first quarter of 2015, this relationship argues that there is an excellent chance of a significant stock market correction.

Usual disclaimer:  This post contains opinions and observations. It is not professional advice in any way, shape or form and should not be construed that way. In other words, buyer beware.

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