Two Big Reasons to Worry About Stocks
Screamingly high share prices relative to corporate sales and shrinking profit margins are flashing a warning.
The market may be poised to shift into a lower gear.
Photographer: samxmeg/E+ via Getty Images
During the latest earnings season, U.S. companies delivered a message that, on the surface, gave investors reason to cheer: Profits were back to growing again after a year in which they had suffered a decline. But that good news masked a development that suggests Corporate America is beginning what could be a painful adjustment, and one that could put a damper on future stock returns.
With most companies having reported, earnings growth was 0.6% on average, according to Credit Suisse. That was positive, but also puny compared with the 3.2% average growth in revenue. Tighter profit margins were the reason for the disparity; they shrank by 2.5%. And that’s where the trouble lies.