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Lower Margins May Fail to Deter U.S. Equities: Chart of the Day

Anyone who presumes U.S. stocks will decline as companies become less profitable is overlooking history, according to Ian Scott, a global strategist at Nomura Holdings Inc.

The CHART OF THE DAY shows income, adjusted for changes in the value of inventories and for wear and tear on buildings and equipment, as a percentage of gross domestic product. Data from the Federal Reserve and the Commerce Department were used in the calculations.

Last quarter’s earnings amounted to 10.1 percent of GDP, marking the first time they exceeded 10 percent since the Fed began compiling quarterly figures in 1947.

“With such an elevated margin, things will surely reverse soon,” Scott, based in London, wrote two days ago in a report with a similar chart. “History tells us to be cautious in jumping to a bearish conclusion based on a likely turn.”

Scott cited eight peaks in profits relative to GDP between 1955 and 2006. Each occurred in a different cycle of economic expansion, as the chart shows. After they were reached, the Standard & Poor’s 500 Index averaged a 4 percent gain in the following year and a 12 percent advance in the next two years.

The only high to precede losses for the one- and two-year periods was recorded in the fourth quarter of 1972, just before the 1973-1974 bear market started. Earnings were 5.7 percent of GDP for the quarter.

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To contact the editor responsible for this story: Nick Baker at

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