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Do Investors Realize How Much Risk They're Taking On?

•, by Sven Henrich

But there's something insidious going on underneath the valuation equation and that is: Investors paying higher and higher forward multiples not realizing that they do.

Why? Because corporate profits are actually not expanding. Not only are they not expanding they're shrinking on an aggregate level.

What if I told you corporate profits before taxes actually peaked in 2014, 5 years ago? Really, it is true:

And if you look closely you realize that this a trend that happens preceding recessions. Now this trend can last a few years as it has now, or in the period in the  mid 90's leading to the 2000 top, or it can happen more quickly as in the 2006 – 2007 time frame.

But note, this decline in corporate profits presages the end of a business cycle, i.e. an upcoming recession, but markets tend to keep rising until that happens:

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