Is the top in U.S. stocks in? The consensus is “no”–corporate profits are rising, the U.S. economy is recovering and has reached “escape velocity,” i.e. it can continue expanding even as the Federal Reserve ends its monetary stimulus (QE) and plans the first increase in interest rates since the zero-interest rate policy (ZIRP) was launched in response to the Global Financial Meltdown.
Many observers have noted that global capital flows (from the risky periphery to the less-risky core) favor U.S. stocks and bonds–another reason to see the 5.5-year rally continue to new highs.
The case for the top being in rests on three pillars: extremes in monetary manipulation (oops, I mean policy), sentiment, leverage and liquidity, the rise of the U.S. dollar and the diminishing returns on monetary stimulus and the repression of interest rates.
A number of chart-oriented sites have made the technical case that extremes in sentiment, valuation and leverage will unwind as gravity reasserts itself. Various cyclical analyses also suggest that the current Bull rally is getting long in tooth and due for a reversal.
For an abundance of charts that call into question the consensus narrative of “onward and upward forever,” please click through the excellent websites of John Hampson and Lance Roberts.
While conventional pundits are falling over themselves in their haste to issue soothing claims that a stronger dollar is good for corporate profits and the stock market, these feel-good analyses ignore the one key dynamic of a stronger dollar: profits earned in other currencies will convert to fewer dollars as the dollar strengthens. I have covered this dynamic for many years.
This means corporate profits earned overseas will decline as soon as the effects of the stronger dollar filter through to profit statements–that is, by next quarter. Given that up to 50% of global corporate profits are earned overseas, this is not a trivial dynamic.
The fact that the global economy is stumbling into recession is also ignored by those who see corporate profits rising forever. With roughly half of profits of global companies coming from overseas markets, how can a global recession not impact U.S. corporate profits?
