Corporate profits

Adding corporate earnings to the market cap-to-GDP ratio (NYSEARCA:SPY)

In this article, I will look at the popular Total Market Cap indicator (NYSEARCA: SPY) to GDP and adding corporate profits to the equation. The reason I added corporate earnings is that corporate earnings are a leading indicator of stocks in the stock market. The chart below shows an overlay of the Wilshire 5000 Total Market Index [Red Line] vs business profits [Blue Line]. As you can see in the chart, corporate profits started falling 1-2 years before the market peak. The reason this is relevant at this point is that in the first quarter of this year corporate profits fell, and as I will explain in the Chart 2 section below, this could be a sign troubling if earnings decline again in the second quarter. .

Chart 1: Wilshire 5000 Total Market Index/ Real GDP

The chart below shows that the ratio of the total market index to real GDP is at an all-time high and is significantly above the levels of previous market bubbles in 2000 and 2007. Looking at the chart, it is difficult to trying to decipher when a spike occurs after a long steady rise in the market cap-to-GDP ratio. For example, when you look at the period from approximately 1986 to 1990, it appeared that the ratio made a double top, which at the time could have been interpreted as a sell signal. However, the chart shows that after a slight decline in the early 1990s, the ratio continued to rise for another 10 years. I believe the underlying value of stocks is determined by corporate earnings, which is why I wanted to include that in the equation.

Wilshire 5000 Total Market Index/ Real GDP

Chart #2: Corporate Profits

The table below shows the total dollar value of corporate profits. There are a few interesting things I noticed in this chart, the first was that corporate earnings peaked in the third quarter of 1997, which was just over 2 years before the market peak, and earnings peaked in third quarter of 2006, ie 1 year before the peak of the market then. In addition, each of the two previous bubbles had one thing in common: two consecutive quarters where corporate profits fell. This is important because corporate profits fell in the first quarter of 1998, just before a major market decline, and corporate profits fell in the fourth quarter of 2006 and the first quarter of 2007, which was just before a major market decline. Marlet. This is particularly important for the current market because in the first quarter of this year, corporate profits fell significantly, and if corporate profits also fall in the second quarter, based on the last two bubbles, a major drop in the market may not be long.

company profit

Chart #3: (Total Market Cap/GDP) / Corporate Profits

For the final chart, I combined all the data into one formula, and it shows that we are most definitely in bubble territory. The chart shows that the current ratio is higher than the 2007 stock market bubble. However, the ratio is still significantly lower than the 2000 bubble. I think this metric gives a clearer picture than just looking at the total market cap/ GDP.

(Total Market Cap / GDP) / Corporate Profits

Final Thoughts

In conclusion, I think combining the total market value to GDP ratio with corporate earnings paints a good picture that the stock market is in bubble territory. I will be watching the ratio to see if it continues to rise, and in addition I will be looking at corporate earnings for the second quarter of this year to see if they will rise again after bad weather in the first quarter. If corporate earnings fall for a second consecutive quarter, I would be cautious in the market because in each of the last two bubbles, two consecutive quarters of declining earnings have been followed by a major stock market decline within 1-2 years.