Great Profit Expectations Can't Be Met

That said, I can count a number of factors that could result in a contraction and mean reversion of corporate profits: rising interest rates, a tightening labor market, a host of cost pressures in materials and/or an end to the enormous productivity gains of the past five years. As well, in a world of heightened geopolitical risks, normalcy can quickly morph into abnormalcy -- and higher prices of "stuff," like oil, to levels never imagined.

Although the U.S. economic upswing of the last several years provides a vivid example of how profits, investment, and an exuberant stock market can reinforce each other, long business expansions, as seen in the chart, have been hard to sustain over time.

The most vivid example outside the U.S. was Japan in the 1980s, when an investment-driven and speculative boom gave way to protracted stagnation. In the U.S., after deterioration in the 1970s and early 1980s, U.S. business cycles moderated again, as in the first two post-World War II decades. But globally, recessions became more frequent and more severe in the second half of the postwar era.

History teaches us that "what goes up must come down."