A warning sign for the market is that corporate profits are not keeping up with inflation.
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The S&P 500 is up more than 25 percent this year as fears of a swine flu have dissipated. Credit...Richard Drew
The S&P 500 is up more than 25 percent for the year, and is up more than 4% this week. The Omicron variant of the coronaviruses caused some concern, but it quickly faded.
According to the DealBook newsletter, this makes some market watchers nervous because of a metric that suggests that stock prices may be too high given the level of corporate earnings and rising inflation.
The S&P 500 has a negative real earnings yield, which is the inflation-adjusted ratio of earnings per share to the stock price, the lowest since 1947, according to a recent note to clients by Bank of America equity strategists. The analysts wrote that negative yields are rare and precede stock market slumps.
Corporate profits are not keeping up with stock prices. A negative real earnings yield means that a company is not generating enough profits to keep up with rising prices, because real yields subtract inflation from the measure. The real earnings yield is negative because of October's inflation number.
The last time the S&P 500 had a negative real earnings yield was in 2000, before the tech bubble burst. During the 1970s and ’80s, it happened twice. The S&P 500 has a negative real earnings yield, but it sank recently as inflation has risen.
There are two ways a negative earnings yield can turn into a positive one.
Some economists think it is possible for inflation to drop.
At a time when wages are rising and supply issues are interfering with plans, corporate profits could accelerate faster than expected.
The stock market has set a number of records after the initial shock of the Pandemic. The gravity-defying rise may not last much longer if analysts consider the numbers. The stock market fell on Thursday.
In a world where negative rates are almost accepted as a norm, we live in.
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