Chinese stocks have rebounded — but Asia Unhedged sees dark clouds on the U.S. side.

With zero U.S. economic growth in the first half and a likely encore in the second, a 10% correction in the S&P 500 is likely.

Our prediction is based on two big takeaways from U.S. data released May 29. First, the Commerce Department’s gauge of corporate profits differs so much from what U.S. companies are reporting as to raise serious doubt about the valuation of U.S. equities. Second, that big wallop of rebounding growth expected by macro forecast gurus simply isn’t going to happen. Asia Unhedged continues to rate the U.S. market a sell, and expect a 10% correction before the end of 2015.

Unexpectedly flat U.S. consumer spending in April merely reinforces the picture.

We think the Fed will not raise interest rates during 2015. With the Chicago Purchasing Managers’ Index three-month average below the 50% mark for the first time since 2009, it’s tough to make a case for a second-quarter rebound after a negative Q1 in U.S. GDP growth. The Atlanta Federal Reserve’s GDP Now tracking model puts Q2 growth at only 0.8%. There is downside risk to that forecast. Overall U.S. growth is likely to come out at slightly over 1% for calendar 2015, a recession like a rose by any other name.

Another factor to consider is that the new orders component of the Chicago PMI dropped by 13.8%, from an April reading of 55.1 to 47.5 in June. Institute for Supply Management economist Philip Uglow said in a press statement: “We had thought that the April bounce was consistent with a partial return to normal following the weather and port-related slowdown in the first quarter. The latest data for May, however, suggest that this was sucker’s bait and that sluggish activity has carried through to the second quarter.” Most economic savants misjudged the negative impact of falling oil prices on the U.S. economy, where energy consumes two-fifths of capex, as well as the impact of oil prices on the dollar.

The May numbers for the Chicago PMI confirms what simple analysis of the data shows: the dollar index affects the U.S. trade balance with a lag, and the impact on trade peaks six months after the currency moves.

Another red flag in the GDP numbers is the plunge in adjusted corporate profits, and the huge discrepancy between the Commerce Department’s measure of profits (mainly based on tax returns) and profits per share reported by S&P 1500 companies. S&P 1500 companies are reporting per-share profits almost 50% higher than Q1 2010, while the Commerce Department’s measure of profits adjusted for capital consumption (depreciation) and inventory valuation is just 8% higher. Corporate profits unadjusted for capital consumption are just 30% higher.

What to make of this bothersome gap between GDP estimates and corporate reporting? There are two explanations: Greatly differing estimates of depreciation, and equity buybacks that increase per-share profits. There is no “right” way to calculate depreciation, to be sure. But when the Commerce Department’s methodology produces a discrepancy of this magnitude, there is very good reason to suspect that U.S. companies have under-reported depreciation on a vast scale.

U.S. corporations are reporting handsome profit margins on a per-share basis. But they are also reporting declining sales and declining investment. The investment decline would be far steeper if U.S. companies applied the same criteria for depreciation employed by the Commerce Department. All things considered,  the U.S. economy is a cock that won’t fight, and valuations for U.S. stocks appear overblown.

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