Investors are warning over the future path of the S&P 500 as a combination of low wages and the strong dollar place a question mark over corporate profitability.
US wages are at a record low in relation to the country’s GDP – and this accounts for corporate profits being so high.
But it’s a worrying sign, foreboding social unrest and may even lead to a collapse in corporate profits as consumers will have less to spend and firms may eventually be forced to pay higher wages.
“Since the S&P 500 started up... the ratio has never been so high,” says James Hanbury of Odey Asset Management
“You need to be wary... You end up with social unrest and you can see it in the political movements at the moment that are trying to change society,” he added.
The strong dollar is also affecting earnings on the blue-chip index. US profits from the rest of the world fell to their lowest level since the financial crisis in March, according to data from the Federal Reserve.
The major stock markets in the US are dominated by multi-national corporations and their earnings, when translated back to dollars, have been hindered by the greenback’s strength.
“This is one reason why we don’t expect the performance of the S&P 500 to be particularly strong in 2016,” says John Higgins of Capital Economics.
Admittedly, the dollar may not rally or maintain its strength this year. “But unless it weakens, the earnings of US multi-nationals’ foreign affiliates and corporate America more generally are unlikely to rebound quickly,” Higgins adds.