FORTUNE -- Stock prices are supposed to follow corporate profits. That hasn't been the case recently. And the gap is growing even wider.
Analysts expect the combined earnings in the first quarter for S&P 500 companies to fall 0.7%, according to research firm Factset. That would mark the second dip in three quarters -- it happened in the third quarter of last year as well.
Nonetheless, the S&P 500 (SPX) hit an all-time high on Thursday.
MORE: Stocks haven't peaked
So what's going on? For now, investors appear to be putting more weight on what stocks could earn later in the year than what they are actually earning now. Analysts expect earning growth to leap to 15.6% by the end of the year.
The problem is if this year is a repeat of the last few, that probably won't happen. For the past three years, analysts have been much more optimistic about the fourth quarter than they should have been. For example, back in 2010, analysts predicted earnings at S&P 500 companies would rise nearly 33%. The actually increase: 18%.
You could argue that the string of recent fourth-quarter earnings disappointments could set us up for a surprise this year. But don't hold your breath. A year ago, fourth-quarter earnings expectations were for 15% growth. Profits actually rose 4%.
This year could break the bad streak, but that's not the way things are shaping up. For the first quarter, of the 128 companies that have pre-announced earnings, 105 have said profits will be lower than expected, according to Thomson Reuters I/B/E/S. That's the largest percentage of negative announcements Thomson has recorded since mid-2001.
And it's not like companies are going to get a great push from the economy. While expectations are improving, most economists still think 2013 GDP growth will come in at around 2.3%. So the rest of the earnings growth would have to come from much higher inflation -- which would boost prices and profits, but not sales -- or some serious margin expansion. Inflation that high is sure to force the Federal Reserve to cut back on its stimulus program, which is sure to slow economic growth along with the market. And profit margins are already near all-time highs.
"What we've got is a market that has been driven by fiscal stimulus and monetary stimulus," says top market strategist Rob Arnott. "Now both ... are receding or at least in question, the private sector is not going to spend."
If interest rates were to suddenly rise to their historic levels, the Federal Reserve's investment portfolio could be doomed.
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The economic picture has improved, but the Fed isn't convinced. Chairman Ben Bernanke doesn't want to be wrong -- again.
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Operation Twist, the Federal Reserve's latest attempt to stimulate the economy, will have an unwelcome impact on corporate pension managers.
FORTUNE -- You know the cliché about every cloud having a silver lining? Well, when it comes to pension accounting, it turns out that at least one silver lining has a cloud.
I'm talking about a largely overlooked side effect of the Federal Reserve's Operation Twist, its program to stimulate the economy MOREAllan Sloan, senior editor-at-large - Oct 26, 2011 6:00 AM ET
What started as a sovereign debt crisis in Europe is slowly turning into a potentially disastrous banking crisis. It's like watching a bad rerun of a movie with a worse ending.
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FORTUNE -- The European economic contagion that began 18 months ago as a sovereign debt crisis is dangerously mutating into a full-blown banking crisis. With Greece in de-facto market default, weak banks within the eurozone have started to MORESep 16, 2011 11:01 AM ET
Bernanke & Co. have some options left to try and spur the economy, but the reality is that nothing will work without action by Congress.
FORTUNE -- Over the last few years, the Federal Reserve's unprecedented monetary policies have conditioned financial markets to step in whenever the economy took a turn for the worse.
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From consumer spending to business investments, it seems nothing is the same this time around.
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Combine all the data from different parts of the economy and you get a pretty ugly picture.
By Daryl G. Jones, Hedgeye
Given the market action this week, it is obviously not a day to pile on with bad news, but we do think it is important to synthesize some of the recent key economic data points and their prospective implications. The theme of jobless stagflation is one we've been reiterating consistently over MOREAug 19, 2011 11:10 AM ET
The most anticipated announcement from the Federal Reserve in months was most notable for its same old messaging: The economy is in the dumps. Borrow cheaply.
FORTUNE – In a bid to reboot the economic recovery following a global stock rout, the Federal Reserve is sticking by its old toolbox.
The Federal Open Market Committee today signaled plans to keep interest rates exceptionally low. Officials have resorted to this policy prescription since MORENin-Hai Tseng, Writer - Aug 9, 2011 3:58 PM ET
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