Global markets in focus

Where are we in the corporate profit cycle?

2022年4月12日
Talley Léger
Talley Léger
Senior Investment Strategist
Where are we in the corporate profit cycle?
Key takeaways
Fundamentals

Softer manufacturing activity suggests peak earnings growth is likely behind us.

Upside

In my view, investors should participate but lower their expectations for absolute returns.

 

As my regular readers know, I’ve been bullish on earnings for over a year (and bullish on stocks for even longer), and I believe that has been the right view. But where are we in the corporate profit cycle today? Has the fundamental outlook changed?

The Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) is one of my preferred gauges for assessing where we are in the corporate profit cycle. The ISM PMI is a direct measure of expectations captured by business surveys of production and the general economic climate. More importantly, as shown in Figure 1, this sentiment indicator has helped to foresee earnings trends roughly half a year in advance.

After correctly signaling a V-shaped earnings recovery, manufacturing activity now suggests that peak earnings growth is likely behind us. Looking ahead, softer output suggests we may see slower but still robust earnings growth in 2022 (Figure 1).

 

Figure 1: Manufacturing activity suggests peak earnings growth is likely behind us
Figure 1: Manufacturing activity suggests peak earnings growth is likely behind us

Sources: Bloomberg, Institute for Supply Management, Standard & Poor’s, Invesco, 4/1/22. Notes: PMI = Purchasing Managers Index. EPS = Earnings per share. NBER = National Bureau of Economic Research. Shaded areas represent NBER-defined US economic recessions. A correlation coefficient measures the strength of the relationship between the relative movements of two variables. The values range between -1 and 1. A perfect positive correlation is 1, and a perfect negative correlation is -1. There is no guarantee the forecast will come to pass. An investment cannot be made in an index. Past performance does not guarantee future results.

Where are we in the market cycle?

Historically, investors have been amply rewarded by simply sticking to stocks in periods when earnings growth was positive, as it is now. While I believe stocks remain the place to be amidst a moderating economy, peak earnings growth should compel investors to lower their expectations for absolute returns. In other words, I expect stocks to continue doing well in 2022, just probably not as well as they did in 2021 and 2020 (Figure 2).

Figure 2: Stocks did best during periods of positive earnings growth
Figure 2: Stocks did best during periods of positive earnings growth

Sources: Bloomberg L.P., Standard & Poor’s, Invesco, 12/31/21. Notes: Y/Y = Year-over-year. *S&P 500 % change = Compound annual growth rate (CAGR). Shaded areas represent periods of negative earnings growth. White areas represent periods of positive earnings growth. An investment cannot be made in an index. Past performance does not guarantee future results.

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