Company outlooks, the other half of the earning season, are also strong. Forecasts for the quarters ahead, the light green bars on the far right of the graph, point to at least two more quarters at the same rate of growth. Given that results have consistently beaten expectations, profits in the third and fourth quarters may easily exceed second-quarter growth. Note expectations of strong profit growth stand in contrast to second-half expectations for slowing economic growth.

Stocks -- and the wait goes on
Lagging share-price performance is one of the central features of the post-millennium economy. As the graph below shows, year-on-year changes in the S&P 500 have underperformed year-on-year changes in profit growth for 15 of the last 17 quarters! This time last quarter, share prices were narrowing the gap and making for an upbeat stock-market outlook. But the new widening is a disappointment that points to a continuation of the long downbeat trend.

It's reasonable to conclude that we are stuck in a period of secular stock-market underperformance. Psychological revulsion at the Y2K bust is probably part of it. Another factor no doubt is mistrust over corporate misdoings, now heightened by the widening investigation into company options. Terrorism and the Middle East may be curbing risk appetite. High gas prices and slow job growth, two factors hurting consumer confidence and retail spending, are also to blame. Two years of rising interest rates haven't helped either.

But profits are not to blame. The above graph compares year-on-year changes in total corporate after-tax profits (green line) with changes in the S&P 500 index (red line). The millennium bubble in the late 90s really stands out, a period when stock market gains far exceeded what was really a period of flat profit performance. But profits over the past several years have been picking up sharply, especially recently. Stocks, however, have been mostly lagging and certainly have not been over-anticipating future profits.