Counting today’s fall in Dow Jones Industrial Average futures, the index is down about 9% from the late January peak, not quite has as much as the decline in the Shanghai Composite. The composition of the decline is informative.

Stock declines

The largest point contribution to the decline (about 342 points out of the overall 2134 points lost) came from 3M, which is the poster boy for peak profits. Next came Goldman Sachs, the most successful financial company, followed by Caterpillar, the star of the Trump rally and a major exporter. Major consumer staples names (J&J, Wal-Mart, McDonalds, P&G) were the next-worst group in terms of contribution to decline.

These indicate several points of weakness:

1) Peak earnings will continue to be a theme; as noted below, unadjusted pre-tax profits show a declining trend, and fell year-on-year during the first quarter.

2) Financials will continue to struggle with a flat yield curve.

3) Consumer demand remains questionable given low nominal wage growth and rising oil prices (as I noted elsewhere, there is a distinct trade-off between consumer staples stocks and energy stocks.

Here (again) is the chart of consumer staples vs. energy:

Consumer staples vs energy

Underlying US corporate profits are soft on a GDP basis
First-quarter US corporate profits before tax were down 3.8% year-on-year, before inventory valuation and capital consumption allowance. With the Commerce Department’s adjustments, profits were up 6.8% year on year. After tax, profits rose 16% year-on-year due to the corporate tax cut.

The unadjusted number is a better measure of corporate profitability, and profit growth appears to show a declining trend over the past seven years of recovery.

Peak profits