The third quarter is certain to be the 13th three-month period in a row in which corporate earnings have grown at more than 10pc. If the analysts are right and the final quarter posts another double digit rise then this will be the longest and strongest profits upswing since the Second World War.
Why have profits been so strong? Mike Lenhoff, a strategist at Brewin Dolphin, thinks one reason is the fact that the American economy is not as weak as the headline GDP numbers suggest. "If you look at the detail of the GDP numbers, consumer spending has been surprisingly strong," he says. The consensus view was that a housing slump would see Joe Public sitting on his wallet, but consumer spending is still growing at an annualised rate of 3pc.
The global economy outside America is also still firing on all cylinders, Lenhoff says. While the S&P500 is not as international an index as the FTSE100, it still derives around 40pc of its sales from overseas so the relative buoyancy of Europe and Asia provides useful support to the earnings of America's global corporations.
"Globalisation has also intensified competitive pressure," Lenhoff adds. "It's putting companies under the cosh and constantly forcing them to refocus and innovate." That, he says, is driving margins and productivity higher, allowing companies to drive profits even against an apparently unsupportive economic backdrop.
Finally, the emergence of China and increased immigration has forced wages lower, helping corporate profits take an ever larger slice of the economic pie. As the chart shows, profits are a bigger proportion of GDP today than at any time since the 1950s.
Earnings is the 800 pound Gorilla the bearish analyst want to hide. That is one of the reason the market has been resilient for last one year in spite of several people calling for a top. All trends ultimately end, but till they continue, buying the dip is the correct trade.
I would love a drastic , bone chilling bear market for a year or so. I have had one of the best year after the 2002 bottom. Earnings and momentum strategy work very well in the beginning of new bull move. They also work in the late stage of bull moves.
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