Profits drive equity prices higher

Mark Perry's recent post on the relationship between corporate profits and equity prices reminded me that I haven't updated the above chart—which includes data beginning in 1959—for awhile. It's a basic demonstration of the fact that higher equity prices today are justified by the level of corporate profits.

The chart above shows how the measure of corporate profits in the first chart (after-tax adjusted profits from the NIPA accounts) compares to reported earnings per share. I discussed why the two appear to diverge in the past few decades here. NIPA profits rose 8% last year, and S&P earnings per share are up 6% in the year ending last April.