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Earnings Season Kicks Off

Corporate Profits Vs S&P 500 Index Vs Wages

Earnings season kicked off tonight with Alcoa providing poor results compared to analyst expectations. I’m not sure why they are such a hurry each earnings season to complicate things, but that is how it seems to work out based upon recent history.

Honestly, I believe that earnings overall this quarter will be better than analyst expectations once more companies begin to report.

However, I want to focus on the chart above that comes from the St. Louis Federal Reserve and was put together by Dirk van Dijk at Zacks. If you look at the thin blue line, that represents corporate profits over the past 54 years. It is in comparison to the green line which is the S&P 500 Index over that same time frame. The thing to notice here is the wide disparity between corporate profits and the price of the the S&P 500 Index. Looking at this, it gives me some comfort that stocks are undervalued by comparison to profits and that having a fully invested position in stocks is the correct place to be at this time.

You can see in the 1990’s where stock prices got way ahead of themselves compared to profits and it basically took a decade for profits to move up to make stocks fairly valued. However, even though both profits and prices went down during the recession (the gray bar), profits rebounded strongly but stock prices have not followed and in fact have fallen even though profits are at record levels.

I’ll be in touch with more updates as earnings season progresses, but at this point we won’t worry about Alcoa being emblematic of the rest of earnings season.