Mean Reversion

Chart of the Day has yet another fascinating chart. This one looks at inflation-adjusted S&P 500 earnings:

click for larger chart:

20050330

COTD:

"Today’s chart illustrates that inflation-adjusted S&P 500 earnings have surged since the latter part of 2002 and and currently rest at a level that is very near the highs of 2000. Investors will continue to pay close attention to the upcoming round of quarterly reports to determine if earnings can maintain their recent uptrend and support a further increase in stock prices. Stay tuned…"

This chart suggests quite a few things to me: 

Rapid economic reinflation (post crash) fell to the corporate bottom line;
Low interest rates helped companies clean up their balance sheets;
Low wages increased profits;
Tax cuts had a very positive impact on earnings.

I would be remiss if I failed to point out one last thing: As the chart reveals, the last time we saw a surge in profits — 1999-2000 — we were near the peak in the market. Its a pretty straight forward analysis:  As earnings momentum peaks and then fades, markets are vulnerable to corrections. Not the 15% I called for on Monday, but real, major, ugly crashes.

Also, note that with this post, I have added the category "earnings."

Source:

Chart of the Day

http://www.chartoftheday.com/20050330.htm?t

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