A Caution Signal on Profits. A Red Light for Stocks?

Paul J. Lim, financial writer at U.S. News & World Report, had an interesting, but cautionary article in Sunday's New York Times.

Corporate profit growth is already decelerating at a significant pace. And so, too, are earnings expectations for the coming year.

Many market strategists believe that earnings have a bigger influence on the stock market than the overall economy does.

What’s important is not just the rate of earnings growth, but also the underlying trends. When earnings growth is low but on the upswing, it’s often a good time to invest, said Tim Hayes, chief investment strategist at Ned Davis Research in Venice, Fla. That’s because investors are anticipating better times to come. But periods when the earnings growth is high but falling tend to be challenging for the market, Mr. Hayes said.

The already slowing profit picture indicates that the economy has been weak for some time and may be weaker than some people have assumed.

And if that’s the case, investors may start to question what exactly is propping up the current bull market.