"Our concern is not that by waiting so long, the Fed is behind the curve (although that also is possible). Rather, by waiting too long to start the process, the Fed has allowed its traditional exit ramp (i.e., raising interest rates against strong gains in corporate profits) to expire," Paulsen said in a report for clients Friday. "Consequently, the Fed is now about to begin the process of raising interest rates without its traditional buffer of recovering profitability."
S&P 500 companies reported a 3.2 percent gain in first-quarter profits despite a revenue decline of 1.7 percent, according to S&P Capital IQ. The second quarter is expected to show a 4.3 percent decline from the previous year; if past beat trends hold up, the overall picture likely will show flat to slightly negative growth.
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For the full year, earnings are expected to be up just 0.4 percent from 2014. Paulsen said a combination of near-full unemployment leading to higher wage pressure, coupled with declining productivity, will pressure profits.
Indeed, stocks have struggled this year as the Fed has contemplated when it will be appropriate to hike. The S&P 500 is up just 2.75 percent year to date. At its meeting this week, the central bank gave few overt clues as to when the first increase will occur, though traders at the Chicago Mercantile Exchange assign the highest probability to December.
Such a stagnant picture does not create an attractive market backdrop for a tightening cycle.
"Although profits are likely to continue growing in the next few years, even under the most optimistic assumptions, earnings growth will not be as dramatic as it was earlier in this recovery," Paulsen wrote. "The Fed's exit ramp, which normally buffers the impact of its early tightening moves, has already expired."