Profits and profit expectations are ultimate what drive stock prices. And the worry is that fragile and weak profit growth is about to make a big turn for the worse.
“One thing [SocGen’s Andrew Lapthorne] has been highlighting for some months is just how incredibly anemic profits growth has been in both the developed and emerging markets, the latter being particularly poor having contracted for the past two years,” wrote Edwards.
The widely followed measure of profit growth are adjusted or pro-forma, which often has the affect of boosting earnings. However, even these numbers don’t look good. […]
Edwards pointed to this quote from Lapthorne:
“Of course even these MSCI figures have been flattered by a reduction in the share count plus lower interest rates and tax charges. If we look at overall growth in earnings before interest and tax, or indeed gross cash flow, we find that neither has really moved for the last couple of years. It would appear then, that at an aggregate level, most profit growth is the result of astute financial engineering rather than improving cash flow — yet another sign of a tired, long in the tooth, profit cycle.”
Do you remember 2007-2008, and the economic carnage that occurred? Does your portfolio still bear the scars? It’s popularly called the “sub-prime crisis,” having been sparked by government-enabled foolishness in the mortgage markets, which Wall Street passed on the world.
With that as background, here’s a current quote from Albert Edwards of Societe Generale, the big French mega-bank:
“The ongoing EM [emerging markets] debacle will be less contained than sub-prime ultimately proved to be. The simple fact is that US and global profits growth has now reached a tipping point and the unfolding EM crisis will push global profits and thereafter the global economy back into deep recession.”
Did you get that? “…less contained than sub-prime…” Buckle your financial seatbelt; this ride is likely to get very bumpy.
…even if the Fed resumes massive QE at some point as the world melts down, and markets desperately attempt their return to the dream trance, they will instead find themselves locked into a Freddie Kruger-like nightmare in which phase 3 of this secular bear market takes equity valuations down to levels not seen for a generation.
Again, for emphasis: The secular bear market will likely take “equity valuations down to levels not seen for a generation.” Um, no matter what number of years you use for a “generation,” getting back to those depths is a thought I’m confident most investors could never even fathom.