Tags: Hulbert | corporate | profitability | stocks

Hulbert: Drop in Corporate Profitability Bodes Ill for Stocks

By    |   Thursday, 26 June 2014 09:34 AM

Corporate profits slid to 8.8 percent of GDP in the first quarter, the lowest level in almost four years, and that's not a good sign for stocks, says Mark Hulbert, editor of Hulbert Financial Digest.

"Future historians may eventually look back and pinpoint that report as the beginning of the end of this aging bull market," he writes in his MarketWatch newsletter.

"That's because the first quarter's decrease could signal the long-awaited return to historically average profitability levels. If so, the stock market will have to struggle mightily just to keep its head above water over the next five years."

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Dow Predicted Will Hit 60,000 — Buy These 4 Stocks Now


In the past, profit margins have reverted to the mean, James Montier of money manager GMO tells Hulbert. The long-term average is 6.3 percent of GDP, so profitability has a long way to drop, Hulbert notes.

And what would a reversion to mean do to stocks?

It could mean an average annual return of negative 2.8 percent for the next five years, Hulbert explains. "If so, the S&P 500 in the summer of 2019 would be trading at 1,703," he states. The index closed at Thursday at 1,957.22.

"Unless corporate profitability has reached some kind of permanently high plateau, the recent drop is just the beginning of a much bigger decline."

Uri Landesman, president of Platinum Partners, a money management firm, sees stock prices stumbling in the next three months.

"There is a tremendous amount of momentum in the market," he tells The Wall Street Journal. "But I don't think it's going to take much to spook this market. The longer you stretch it out, the more likely [a pullback] is to happen."

The S&P 500 hasn't endured a 10 percent correction since October 2011.

Editor’s Note: Dow Predicted Will Hit 60,000 — Buy These 4 Stocks Now

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InvestingAnalysis
Corporate profits slid to 8.8 percent of GDP in the first quarter, the lowest level in almost four years, and that's not a good sign for stocks, says Mark Hulbert, editor of Hulbert Financial Digest.
Hulbert, corporate, profitability, stocks
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2014-34-26
Thursday, 26 June 2014 09:34 AM
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