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Richard Bernstein: Corporate Profit Cycle May Be Turning

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May. 24 2016, Published 5:27 p.m. ET

We’ve been in a profit recession

In an interview with CNBC’s Michael Santoli, Richard Bernstein noted that the US corporate universe has been in a profit recession for three or four quarters. Bernstein is the founder and CEO of Richard Bernstein Advisors. He added that the peak growth rate in earnings occurred about seven quarters ago, as shown in the below graph. Considering the earnings results from 1Q16, the peak in earnings also occurred seven quarters ago.

Because Bernstein focuses on the corporate profit cycle, his reading of the market movement in the past one-and-a-half years is that the Markets have been reacting to this decelerating profit cycle in this period.

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Is the worst of the profit recession behind us?

Bernstein thinks so, suggesting that the worst of the profit recession was seen in 4Q15. However, this does not mean that corporates have returned or will return to health soon. Because corporate profits follow a cycle, there should be a gradual move toward a peak rather than a surge. Bernstein mentioned that about in about 12–18 months, profits may grow at a 20% clip.

How has Richard Bernstein Advisors changed its portfolio?

Because corporate profits are behind the investment philosophy of Richard Bernstein Advisors, it started becoming defensive as soon as it saw a deceleration in the profit cycle. Being defensive means reducing the allocation to equity while increasing the allocation to fixed income instruments.

Even in the equities space, the sectoral allocation changes depending on the stance. A defensive position means higher exposure to consumer staples (PG), utilities (PPL), healthcare (PFE), and telecom services (TMUS), compared to other sectors.

Several ETFs can help you invest in these defensive sectors, including the Consumer Staples Select Sector SPDR ETF (XLP), the SPDR State Street Global Advisors ETF (XLU), the Utilities Select Sector SPDR ETF (XLV), and the First Trust Health Care AlphaDEX ETF (FXH)

Among large-cap mutual funds, a few (FDGRX) (MFEGX) have a combined one-fourth or more of their portfolios invested in these sectors.

During this interview, Bernstein made an intriguing point about what markets react to. Let’s explore that point in the next article.

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