"Presently, corporate profits as a share of GDP remain about 60-80% above their historical norm, depending on the measure one uses. Meanwhile, Wall Street is enthusiastic not only to take current price/earnings multiples at face value, but to extrapolate strong future rates of earnings growth. As a reminder of the reality that will predictably follow this mistake, the chart below shows the ratio of corporate profits to nominal GDP (left scale), along with the subsequent annual growth rate of corporate profits over the following 4-year period (right scale, inverted). Note that the inverted right scale means that higher values represent slower profit growth.
At present, current profit margins are consistent with earnings contraction over the coming 4-year period at something close to a -10% annual rate, implying a drop in corporate profits by more than one-third in the coming years (even assuming intervening growth in GDP)"
Read the full report here (h/t Business Insider).
Related: Hussman on Record High Profit Margins vs. Stock Valuations (3/2012)