This Late Stage Economic Cycle Could Be Coming to an End

The current robust earnings season shows that investors are willing to pay for companies that are performing well but are also overlooking those where “growth is anything but stellar,” says a recent article in The Wall Street Journal. Based on history, it says, this could be a “sign that the stock market rally, and the economic expansion, is nearing its end.

Late in economic expansions, the article says, “earnings growth slows and profit margins narrow. That puts a premium on companies that are able to keep generating growth. Indeed, in the latter stages of both the bull market that ended in 2007 and the one that ended in 2000, growth stocks outperformed.”

According to data from Thomson Reuters, domestic after-tax profits as a share of GDP peaked over two years ago, indicating that a “similar dynamic may be in place now.” Investors, the article says, have become quite picky and are avoiding companies that aren’t showing strong earnings growth.

It is, however, difficult to know how long this late stage environment will persist. The article concludes: “The rally in growth stocks will probably end badly, but it also may only have just begun.”