The current environment – just enough economic growth and suppressed wages – has allowed corporate America to churn out record profits, a factor helping to support this year’s big rally in stocks. I believe this will continue into 2015, although higher rates suggest that any gains are likely to be accompanied by more volatility.
Market Realist – Corporate profits are at record highs
The graph above shows corporate profits in the US as a percentage GDP. The graph shows that corporate earnings improved as a percentage of GDP since the recession in the late 2000s. If the economy improves and wages remain suppressed, corporate profits will also improve. This would be positive for US stocks (SPY)(IVV).
Since Japan (EWJ) will be starting its own quantitative easing (or QE) program to boost growth and Europe (EZU) is considering QE, the US is ahead of the rest of the developed markets (EFA) in terms of growth. This is one of the reasons why US stocks outperformed the developed world this year.
Please read Market Realist’s Must-know: Is the end-of-year swoon ahead? for more on whether stocks could continue to outperform other asset classes.