As of the end of the third quarter of 2006, profits had risen to 12.4% of GDP. That's in the 99th percentile of all prior quarters since 1947.
In order for profits to rise 10.5% with GDP rising just 4.9% in the next four quarters, profits would have to rise to 13% of GDP. That level has been achieved or exceeded just once before on this chart, in the fourth quarter of 1950, which would put a 13% reading in the 99.9th percentile: Possible, sure, but axiomatically unlikely.
Something's gotta give. Either earnings growth will slow relative to expectations or GDP will have to rise. And if GDP grows faster than is currently discounted, won't inflation rise as well?
With earnings growth bound to slow, with investors convinced that economic strength leads to rising inflation and with interest rates rising, how's the stock market going to go up? I'll look at this question in my next column.
P.S. Will you be there when Cramer makes his next move?
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At the time of publication, Oliensis had no positions in any of the stocks mentioned, although positions may change at any time.
Adam Oliensis is president of Dog Dreams Unlimited, a guaranteed introducing futures brokerage, and editor of the trading service The Agile Trader. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Oliensis appreciates your feedback; click here to send him an email.
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