Last month I argued that the summer rally in US equities would not last. The S&P index hit its year low on July 23 at 797. It rallied to 972 on August 27. Now it's back below 900. In August, investors had turned bullish on hopes of interest rate cuts. And they were encouraged about corporate governance: CEOs signed off accounts with few nasty surprises.
Bulls argue that continued strong productivity growth and consumer spending will prompt recovery and rising corporate earnings that will underpin equities. But I reckon profit margins will only recover after more job losses and slower wage growth. It will be a year or more before a sustained equities rally can kick in. I expect the S&P to fall to 700 before that.
Before the US hits a sustainable 3% to 3.5% GDP growth rate, corporates must drastically improve margins.