Profit trend and cycle analysis: a long-medium-short term sanity check
Profits fluctuations are often related to the economic business cycle as they are a crucial driver for investment decisions and ultimately are an important engine for economic growth.
Historically profits swing around trend with certain regular frequency closely linked with the so called inventories cycle or Kitchin cycle in business cycle theory (usually lasts 3-5 years). This cycle can explain a significant portion of profits volatility, namely the down and up turns, and it’s definitely relevant for estimating the turning points from an investment perspective.
There are, however, other important cycles with lower frequency, higher length and more dramatic and structural impact on profits generation. Usually they are influenced by other well-known cycles; for instance the Juglar and Kondratieff cycles which last usually 7-11 and 14-25 years respectively, and they affect persistently the long term trend shifts as they are often related to fixed and infrastructural investments.
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