Chart of the week: US stocks outrun profits

Investors beware, says Albert Edwards of Societe Generale. America’s equity market “has become totally detached from underlying profits” over the past three years. The chart shows the S&P 500 index in relation to the level of national pre-tax profits measured in billions of dollars (so they are currently around $2 trillion). This is the gauge used in the US national accounts, as opposed to the endlessly manipulated quarterly earnings figures US corporations like to present to Wall Street. A large gulf has opened up between official companies’ earnings and the level of the stockmarket index. “We saw exactly this disconnect in the late 1990s tech bubble and we know how badly that ended!”

“Imagine a stock that [boasted] margin expansion and earnings-per-share [EPS] growth, but had got cheaper… this scenario is reality, but on a regional basis… We looked at three components – margin expansion, multiple expansion and other EPS growth – to determine total return across four regions over the whole cycle: the US, Japan, Europe ex-UK and emerging markets… the US experienced growth in all the three components of return. Emerging markets have [seen] margin contraction, but at least the multiple got cheaper. Europe [has become] more expensive via multiple expansion, while experiencing a contraction in margins and other EPS growth. The standout… is Japan [with] margin expansion of 2% annualised, and other EPS growth of 0.75%, while multiples have fallen by 2.75%… Japan is becoming cheaper despite having got operationally better.”
Man Institute

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