U.S. Equities: Weak Fundamental Support

Despite a sketchy fundamental backdrop, an accommodative Fed is likely to support share prices for a while longer.


The U.S. equity market capitalization is larger than total GDP, yet profits are steadily losing share relative to GDP. This is not a sustainable combination and a re-coupling is inevitable at some point. We doubt profits will close the gap. Profit margins are mean reverting and have already been well above average for a prolonged period of time. In fact, wage inflation has been handily outpacing pricing power and there is little volume expansion globally. Furthermore, the message from the latest BIS quarterly global credit flows update is that the credit impulse remains a substantial drag on economic activity, and by extension, earnings performance.

Bottom Line: A gradualist Fed, reduced threat of incremental near-term U.S. dollar strength and no imminent risk of a recession could keep U.S. stocks supported despite the questionable long-term fundamentals.