Wall Street may be too exuberant about corporate profits -- and by extension stocks -- this year. 

Why you ask? Because global trade conditions are going the opposite direction of earnings, points out long-time market bull James Paulsen of The Leuthold Group.

Says Paulsen: "Robust earnings gains about the globe have bolstered investor confidence. EPS for the MSCI ACWI have risen by about 45% since August 2016! However, the chart below offers a cautionary signal regarding global earnings gains in the next year. A leading indicator of global trade has shown good prowess in forecasting global earnings during the ensuing eight months. Currently, this trade indicator is pointing to a significant decline in global earnings momentum. This coincides with a notable deceleration in most economic surprise indexes (ESI). While the U.S. economy remains healthy, its ESI has declined from above +80 at year-end, to below +18 currently. Moreover, the ESI for emerging economies has slowed from a recent peak in March of +40, to a current low of almost -4. Finally, the ESI among the G10 economies has fallen from +50 in December to -30 today."

So if you bought stocks off the latest cooling of trade war rhetoric between the U.S. and China, might want to reconsider. It's not like global trade will magically spring back to life amid one Fox News interview from Treasury Secretary Mnuchin. 

Pay attention to leading trade indicators. Source: The Leuthold Group.
Pay attention to leading trade indicators. Source: The Leuthold Group.

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