The US economy is struggling, but stock market indices are higher than one would expect at this stage of the economy. An examination of the daily changes in the stocks that make up the S&P 500 index shows that correlated changes – those that describe 'herd-like' behavior – are becoming less frequent. Investors, it seems, are looking more at corporate data and less at macroeconomic variables.
A feature of the current economic and corporate climate is that, despite the weakness of the economy, profits remain high. Over the past four quarters, national accounts profits are estimated at their highest post-war level (as a percentage of GDP). And this is true both before and after tax (after-tax profits are the most relevant for stock prices). Part of the reason is that these profits also include those made overseas by American companies. However, even a measure of 'domestic' profits indicates that their level is close to historical highs.
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