The two reasons why companies have had such success in driving their profit growth into a V-shaped recovery has been via an exceptionally robust foreign sales performance and relentless cost-cutting. But you can’t cut costs forever and we are already seeing signs that the downward momentum in unit labour costs is subsiding. On top of that is the surge in material costs, which we have not seen percolate yet, but will surely compress margins from their current five- decade highs.
We should start to get some corporate guidance numbers next week but for the time being we do have the analyst upgrade-downgrade ratios, which has stagnated recently. They are no longer going up and are actually going down in six of the ten sectors. Those with positive momentum include technology and materials. Utilities and consumer discretionary are not screening well at all.