US corporate profits expanded at an annualised rate of just over 5% in Q1, following an increase of nearly 10% in the prior quarter. Margins were boosted by renewed downward pressure on unit labour costs. Despite the prevailing high level of unemployment, the scope for a further increase in margins is limited at this stage of the business cycle. Indeed, they tend to rise and fall with the business cycle and the prospects for the US economy are looking increasingly bleak. We continue to think the stock market is vulnerable to disappointing earnings.
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