What We're Reading

Well, here it comes—September. It’s widely considered the worst month of the year for equities for good reason since it has historically seen the worst performance. Per Ryan Detrick, Senior Market Strategist, “September is the banana peel month, as some of the largest dips tend to take place during this month. Although the economy is still quite strong, this doesn’t mean some usual September volatility is out of the question—in fact, we’d be surprised it volatility didn’t pick up given how calm things have been this year.”

With the Federal Reserve, Bank of Japan, and the European Central Bank all set to announce interest rate decisions this month, and the S&P 500 Index up on a total return basis nine consecutive months as of the end of July, the stage is set for some fireworks in September.

Here’s some data to consider as September approaches:

• Since 1928, no month sports a lower average return than September, with the S&P 500 down 1.0% on average. February and May are the only other

The world’s biggest corporations have been riding a three-decade wave of profit growth, market expansion, and declining costs. Yet this unprecedented run may be coming to an end. Our new McKinsey Global Institute report, Playing to win: The new global competition for corporate profits, projects that the global corporate-profit pool, which currently stands at almost 10 percent of world GDP, could shrink to less than 8 percent by 2025—undoing in a single decade nearly all of the corporate gains achieved relative to the world economy during the past 30 years (exhibit).

Exhibit

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From 1980 to 2013, vast markets opened around the world while corporate-tax rates, borrowing costs, and the price of labor, equipment, and technology all fell. The net profits posted by the world’s largest companies more than tripled in real terms from $2 trillion in 1980 to $7.2 trillion by 2013,¹ pushing corporate profits as a share of global GDP from 7.6 percent to almost 10 percent. Today, companies

Stock markets have enjoyed a banner half-decade, forcefully reclaiming the ground lost to the financial crisis, and then some. This vigorous performance has occurred thanks, above all else, to two key enablers: surging earnings and recovering valuations. On the surface, there is nothing especially questionable about either. Earnings naturally rise as economies grow, and valuations recover as risk aversion fades.

However, a closer examination reveals a significant vulnerability within this cozy equation. Corporate earnings growth has been, in a sense, too good – persistently outpacing both revenues and the economy. This has driven profit margins to multi-decade highs.

Worryingly, profit margins have long been assumed to be mean-reverting, arguing that these juicy gains may eventually have to reverse. Such a scenario would necessitate an eye-watering one-third decline in the S&P 500. With stakes as big as these, a clear sense of the downside risk is imperative. This report evaluates th

This in followup to my post on Corporate share repurchase programs and my thought that they have increased of late in an effort to boost EPS. 

Please consider this view on Corproate profit sustainability from Califia Beach Pundit:

The fact that corporate profits have tended to track nominal GDP over time is not unusual, but the degree to which profits have outperformed nominal GDP in recent years is exceptional. I've argued for a long time that the market looks at the first chart above and sees a compelling case for corporate profits to revert to their long-term mean (just above 6% of nominal GDP). That would of course imply either a huge decline in profits in the next few years, or an extended period of flat profits, and that helps explain why the market is reluctant to embrace equities.

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