Corporate profits are very healthy

Corporate profits are the mother's milk for equity prices, and they are stronger than ever relative to the size of the economy. No wonder the stock market has done so well in recent decades.

Chart #1

Chart #1 compares corporate profits (adjusted, and ex-Fed profits) to nominal GDP. According to the Q4/25 GDP estimates released today, corporate profits at the end of last year were up 8.4% from a year ago, and they totaled $3.6 trillion at an annualized pace.

Chart #2

Chart #2 shows the ratio of corporate profits to nominal GDP. As of the end of last year, profits were a record-setting 11.5% of GDP. Wow. Just Wow. And it's not just a recent phenomenon. As the chart also shows, relative to the size of the economy, profits in recent years have been running twice as strong as they were in the 80s and early 90s.

Chart #3

Chart #3 shows the long-term path of the S&P 500 index, as compared to an 8% annualized trend. When you add dividend yields of 1-2% per year, buying and holding stock in the country's 500 largest and most successful corporations has yielded about 10% per year since 1950.

Of course, there are times when returns have been far less than 10% per year, and far greater. If you bought stocks in October 2000, you wouldn't have broken even for almost 7 years. In contrast, buying stocks in April 2009 (at the bottom of the Great Financial Crisis) would have delivered annualized returns of almost 15% plus dividends. I was sevaler months early when in November 2008 I argued that investing in stocks was the buying opportunity of a lifetime.

In any event, these three charts suggest that stocks today are neither very cheap nor very expensive from an historical perspective. 

The market is not very nervous

As I write this, we are only 3 hours away from Trump's ultimatum to Iran: open the Strait or face annihilation. Personally, I can't see the current Iranian government being willing to capitulate. By the same token, I can't see Trump carrying out such a threat. 

Perhaps that is what the market is thinking as well, because there is little in the way of market pricing that suggests investors are very concerned about the consequences of today's upcoming events.

Chart #1

Chart #1 shows the 10-yr history of the Vix index, commonly known as the "fear" index. Technically, it's the implied volatility of equity options. A higher value corresponds to greater fear and also to more expensive option prices. When you're nervous it's sometimes smart to buy options since they can minimize your risk. The more nervous you are, the more you're willing to pay. Today's Vix index is elevated, but hardly to an extreme level such as we have seen in prior episodes of fear. 

Chart #2

Chart #2 shows the level of corporate credit spreads. The higher the spread, the more the market is concerned about the outlook for corporate profits. Spreads have ticked higher in recent weeks, but not by very much. If all you knew was the level of credit spreads, you would see this chart and conclude that the market is not concerned at all about the economic outlook. 

Chart #3

Chart #3 is another way of looking at corporate credit spreads: it's the difference between investment grade and high-yield spreads. This too shows very little concern.

Chart #4

Chart #4 shows the yields on 5-yr Treasury bonds (i.e., nominal yields) and 5-yr TIPS (i.e., real yields), plus (in green) the difference between the two, which is effectively the market's expectation for what the CPI will average over the next 5 years. It's tough to see anything here that is out of the ordinary.

I hope the market is right, and I hope the problems in the Gulf are nearing a peaceful resolution. 

Jobs growth remains modest

The March '26 private sector jobs report released today was stronger than expected (186K vs 78K), but only modest when viewed from a multi-month perspective.

Chart #1

Chart #1 shows the monthly change in private sector jobs. For most of the past two years, jobs growth has alternated between strong and weak—up one month, down the following month. Over the past 12 months, private sector jobs growth has averaged a very modest 42K per month.

Chart #2

Chart #2 shows the 6-mo. annualized and year-over-year change in jobs. By these measures, we haven't seen any significant change in a jobs market that is plodding along at a very slow pace. At best, private sector jobs are growing at 0.5% annualized rate—not much to write home about, but not much to worry about either.

Chart #3

As Chart #3 shows, the unemployment rate has been drifting slowly higher, but not at a pace that we would expect to see if the economy were suffering from recessionary conditions. 

Chart #4

As the green asterisks in Chart #4 show, small business owners celebrated when Trump won his elections. But enthusiasm has waned in the past year, and is now only about average.

Given the ongoing hostilities in the Gulf region and the modest growth conditions currently prevailing in the U.S. economy, we are unlikely to see any material improvement in the near-term outlook. The positive contributions of AI-driven productivity gains are likely to be offset by an increase in the demand for money (i.e., a risk-off shift by investors). Meanwhile, the Fed is essentially on the sidelines, worried that higher energy prices could slow the economy while at the same time increasing the risk of higher inflation. The bond market, sensing this dilemma, is not expecting any near-term tightening or easing of monetary policy. 

It's a wait-and-see world we are living in.