The S&P 500 is struggling to breakout above a key resistance level at 4200. Technically that can be interpreted as either good or bad, depending on whether you’re an optimist or pessimist. Either way, my primary reason for concern remains the same- corporate profits are declining.
Another way to think about profits is in terms of a “risk premium”. That’s the amount of yield (premium) that an investor receives above what could be earned in a “risk free” instrument like a US Treasury. A simple calculation of risk premium can be determined by subtracting the yield of a 3 Year T-Bill from the earnings yield of the S&P 500:
(Aggregate Earnings / S&P500 Price) – TBill Yield
There’s often a correlation between the Risk Premium and the S&P 500, but with a long lag time. To illustrate the point, I’ve constructed the below chart. The Risk Premium has been moved FORWARD by TWO years…notice how bottoms in the Risk Premium tend to line up with S&P 500 bottoms.
[As with other data that I’ve shown, this chart also indicates the Market was rapidly declining in 2019, but was rescued by Pandemic Stimulus.]
The Risk Premium hasn’t yet bottomed, and likewise the S&P 500 probably hasn’t either. Applying the forward extrapolation technique, the drop in Risk Premium is forecasting a Market bottom sometime in late 2024 or early 2025. I think given the steep decline in the Risk Premium, the bottom will be occurring much sooner…unless the Fed eases monetary policy (drastically cutting short duration Treasury yields).
So…until there’s more clarity on Profits and Fed Policy, I remain patiently parked in money market funds.
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