The Street currently expects S&P 500 operating earnings to climb roughly 32% in 2012 from current levels, a number that Credit Suisse strategist Doug Cliggott says “looks very aggressive, especially given the already elevated levels of the US economy’s profit margins.”
Cliggott writes in a research note that the profit share of US national income, “in essence, the US economy’s profit margin,” has been climbing steadily since 4Q 2008. When the profit share of national income is rising, the S&P 500 has averaged 12% annual returns, he says. When it’s declining, average annual return falls to 2%.
Now it looks as if the profit share as a percentage of national income may be peaking, Cliggott says, as it was steady at 12.7% in 3Q and 4Q 2010. But here’s the rub: in the last 10-12 years, profit share of US income and S&P 500 operating earnings have been “highly correlated,” he says, meaning a peak in operating EPS “may also not be too far out in time.” Continue reading…
