Should Equity Investors Be Reassured By Record Corporate Profits?

Record corporate profits are the last argument the bulls have left - and Anatole Kaletsky just took it apart with an equation from 1935.

Anatole is a co-founder of Gavekal, one of the few research shops I trust. Institutions pay up to $35,000 a year for it, and the report below is the direct follow-up to the note I shared a few weeks ago.

His thesis:

The profits everyone is pointing to as proof that stocks are reasonably valued are not independent of the AI boom. They ARE the AI boom. Aggregate profits and aggregate investment move together as a matter of accounting identity, not opinion. So when the capex slows, profits fall across the entire economy.

And as he puts it, that is not remotely discounted in today's valuations.

Thank you Anatole for letting me share this INCREDIBLE report:

Many investors have now accepted that warning signs are flashing in financial markets, and especially in US equities (see Regime Change Can Cause Market Madness). Global interest rates are trending upwards; the Iran war has not ended as neatly as many of us expected (see The War Has Ended And Capital Will Rotate Out Of US Assets) and the purveyors of “picks and shovels” to the artificial intelligence gold rush are not meeting their exaggerated financial expectations.

Nevertheless, Wall Street investors who are sitting on the enormous gains accumulated in what is now a 17-year bull market exactly analogous to 1982-99, are showing few signs of serious nervousness or even discomfort, partly because they can still rely on what seems to be an impressive source of fundamental reassurance: