Look at pretax domestic profits as measured by the Bureau of Economic Analysis, and it is easy to be bearish. Profits are down 13% in five years, the biggest drop outside a recession since World War II. President Trump’s tax cut has cushioned the blow to earnings, with after-tax corporate profits falling only a little. Profit margins also are down sharply, with the pretax margin for domestic business lower than the postwar average and below where it stood from World War II until 1970.
Earnings by S&P 500 companies tell the opposite story. Reported earnings per share were at a record in the 12 months to June, up 31% in five years and forecast to keep rising. The after-tax profit margin is slightly down from a record last year, but still higher than any time before that.
Another big problem here is that corporate debt is at record levels. Most of this debt is taken on with the expectation that it will increase earnings. Then of course this situation becomes even bigger problem if economy goes into recession because then every investor suddenly realizes that the companies they’ve invested in have a lot more debt than they expected. Overvalued assets and debt is usually the cause of most recessions. In this case, it could simply be that stocks are overvalued where as in the past it was real estate or tech stocks.