Corporate profits are at risk of falling and here’s what it means…

In 2017, the biggest change to the tax code in 3 decades reduced US corporate tax rates from 35% to 21% — leading to higher corporate income. Since then, the S&P 500 is up by over 57%.

But that trend is at risk of reversing, with Joseph Kalish of Ned Davis Research (via MarketWatch) speculating that corporate profits will decline in the next few years due to:

• Higher corporate taxes pushed by Biden’s administration.
• Higher interest rates are expected to rise over the next few years.
• Higher labor costs from shortages of skilled talent.

Companies are also dealing with rising material and freight costs from pandemic impacts — threatening to lower margins.

What does this mean? In theory, if the average corporate profit margins do fall, stocks, which are reliant on corporate profits, will be negatively impacted.

• But reality is more complicated. According to an analysis by Ben Carlson, there’s no clear correlation between profit growth and stock returns.

It’s difficult to rely on a single factor to justify market movements with hundreds of other factors affecting it all at once.

But what we can rely on is this — staying invested in the market, so you don’t miss the best 10 days of the market that can reduce your returns by 38%.