Profit margins are declining, and we expect them to fall much further.  As you can see from the chart below, Variant Perception’s leading indicator for wages does a very good job of leading US corporate profit margins by a little over a year and a half. The message is that we should see profit margins fall for all 2016 and bottom early next year.  It is unlikely P/E multiples will expand, as they did in 1999-2000 when profit margins fell, and much more likely that stocks will trade down in line with earnings. We apologize to readers for repeating ourselves, but we think these charts are among the most important charts investors should be following right now.

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Source: Bloomberg, Macrobond and Variant Perception

The fall we are seeing in S&P 500 earnings is not solely attributable to poor energy companies. All sectors besides Telecoms, Consumer Discretionary and Healthcare are falling.

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Source: Factset