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Opinion
Jonathan Levin

Corporate Profits May Be the Next Thing to Break

US stocks just had their worst half since 1970, but the earnings and interest rate outlooks both signal the potential for more pain.

Michael Burry predicts earnings compression in the second half of the year.

Michael Burry predicts earnings compression in the second half of the year.

Photographer: Astrid Stawiarz/Getty Images

US stocks just posted their worst first half since 1970, but the slump was all about the price in price-earnings ratios, according to “The Big Short” investor Michael Burry. “Next up, earnings compression,” Burry, the Scion Asset Management founder, wrote Thursday on Twitter. He’s right about corporate profits, but don’t rule out even scantier multiples as well.

The S&P 500 Index’s nearly 20% decline this year has been driven, of course, by the surge in interest rates as the Federal Reserve moves to tackle the worst inflation in 40 years, driving up borrowing costs and making stocks somewhat less attractive relative to fixed-income investments.