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By New_Deal_democrat August 29, 2016 11:18 am
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Updeated Q2 2016 look at corporate profits as a long leading indicator
Corporate profits are one of the long leading indicators, typically peaking more than a year before the start of a recession.  Since these were reported for Q2 last Friday, let's take a look. The graph below shows corporate profits with and without inventory adjustment:
 
 
Typically these move in tandem.  Last quarter was one of the few times the two diverged, as shown in this longer term view:
 
 
In either event, it looks like Q4 of 2015 was the bottom of the profits recession. Since the nearly 20% surge in the US$ from mid 2014 to summer 2015 was a big reason for the hit to profits, some further evidence in support of that assertion is found when we compare profits with the US$ YoY (inverted to better show the correlation):
 
 
Finally, one insight generated by making use of overall leading economic indicators is that, if corporate profits are a long leading indicator, and stock prices a short one, then it stands to reason that corporate profits actually lead, rather than follow, stocks, at least when measured as a quarterly average. If it wasn't clear before, then this graph from Scott Grannis a/k/a the Calafia Beach Pundit (http://scottgrannis.blogspot.com/2016/03/profits-are-down-is-that-bad-fo...), dispels all doubt:    

 
Here's how corporate profits and the S&P 500 (averaged quarterly) compare through the second Quarter, normed to 100 as of the 4th quarter of 2007:
 
 
Stocks remain as richly valued compared with corporate profits as they were back in 2007.
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