This is an update on a comparison I have made previously. Since corporate profits are a long leading indicator for the economy, and the stock market is a short leading indicator, it stands to reason that, contrary to common wisdom, reported corporate profits lead the stock market, not visa versa.
Since we have finished the first quarter, let’s update this relationship. As in the past, I am not concerned with the daily fluctuations of the stock market, but rather its quarterly average. Here is the YoY% change in the S&P 500 (blue) vs. corporate profits (red):