Along with today's revision to second quarter GDP, we received the first estimate of corporate profits for the quarter. Profits rose 3% from the first quarter, and are up 25% in the past year. Plus, they continue to look very strong relative to GDP.
The worst thing you could say about corporate profits, as Art Laffer argues, is that corporations may be doing their best to accelerate profits—to book profits now before taxes go up next year. So profits might be overstated to some extent. But I see profits growing consistently for several quarters, so I'm not sure how significant the overstatement is. Regardless, it remains the case that profits have more than doubled since 1998, while the S&P 500 has not budged, on balance, over the past 12 years. As I've been arguing for a long time, the equity market looks very undervalued to me. Perhaps that's because, like the bond market (see my post from yesterday), the equity market believes the future will be very grim.
Note in this last chart how the NIPA measure of profits continues to be a leading indicator of accounting profits (which are used to calculate standard PE ratios). With strong profits growth likely to continue, it's hard to believe the equity market is going to remain at depressed levels for much longer.