Challenging Albert Edwards: have profits peaked?

With the earning season finished, one of the hardest issues for asset allocators to decide upon is whether corporate profits have peaked, especially in the UK and the US.

By the end of last week, more than 90% of S&P 500 companies had reported, with the results generally better than expected for another quarter. 

The continuous profits-busting performance of US large caps since March 2009 was best summed up by last week’s Fortune 500 List, which revealed the total profits of the 500 companies that make up the index ‘increased by 81% – $318 billion – the third largest percentage gain in the list’s history’.

Likewise, with Friday’s announcement that non-farm payrolls had increased by 244,000, outpacing the economists’ forecast of 186,000 job increases, it would be almost natural to assume the economic recovery is back on track and companies remain confident of continued profits, hence the hiring.

Analyst mood

But Albert Edwards, the Société Générale strategist known as something of a perma-bear, argues that profits may have peaked. The thrust of his argument, in terms of the market, is that there has been a change in analyst optimism.

Edwards says this is at the core of what drives equity prices and in a note to clients explained that a change in US analyst optimism quickly picks up swings in actual optimism.

But in a typically downbeat note on equities, he said: ‘The level of analyst optimism also seems to be turning down (albeit from high levels).’

Edwards adds that although US stock market profits are supposedly booming, a number of indicators, such as pre-tax domestic non-financial profits and core durable goods orders, have ‘stalled’.

He says: ‘Despite the Chicago Fed National Activity Index (CFNI) suggesting that some near-term economic strength is “baked in the cake”, some other key cyclical indicators seem to be rolling over.