With the S&P 500 officially filling the Lehman gap this week it’s interesting to take a look back at now and then. While much of the economy is far worse off (real estate prices, employment) there is one glaring positive – corporate America and her profits are strong. Since the equity market ultimately reflects the underlying earnings of the companies that comprise it, one could easily argue that the US economy is much better off than broad sentiment might make you think. This divergence in sentiment and corporate profits has been best represented by my expectation ratio (see here), which has consistently shown that corporate profits (and the underlying strength of the economy) is much better than investors believe. The bad news for the workforce is that American corporations are clearly learning to do more with less. That will only further strain the sentiment in this environment as the jobless recovery continues. For a more complete overview of the comparison see below:
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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