I've been bullish on the earnings-led bull market in stocks since March 2009 because I believed that it would continue to be led by earnings. So far, so good. However, as I've been noting lately, the bull is running out of earnings power. Consider the following:

1. Pre-Tax Profits by Source. The Bureau of Economic Analysis disaggregates the components of National Income & Product Accounts (NIPA) profits on a pre-tax basis. The data show that the domestic profits of non-financial corporations rose to a record high of $1.1 trillion (seasonally adjusted annual rate) during Q2, up 7% year-over-year. However, profits of financial corporations have stalled in a zigzag fashion over the past three years, while profits from the rest of the world have fallen from a recent peak of $451 billion during Q4 2011 to $422 billion during Q2 2012.

2. Financial Corporate Profits. The S&P, NIPA and FDIC measures of financial corporate profits are looking especially toppy. The FDIC data show that commercial banks have been reducing their provisions for loan losses from a peak of $71 billion during Q4 2008 to $14 billion during Q2 2012. That has boosted earnings. However, charge-offs for bad loans have exceeded provisions since Q1 2010, which is a drag on earnings.

3. Profits from Abroad. I've been arguing that despite the global slowdown, U.S. corporations would find enough business opportunities overseas to offset slower growth in the U.S. The latest data show I got that exactly backwards so far. Domestic profits rose to a record high, as noted above. Profit receipts from abroad, which account for 33.4% of pre-tax corporate profits, declined 3.2% year-over-year, the weakest growth rate since Q3 2009. The problem is that the year-over-year growth in profit receipts from abroad tends to be inversely correlated with the trade-weighted dollar on a 2-for-1 basis. The dollar is up 8.8% year-over-year through July, implying a decline twice as much for overseas profits.
