While many argue that corporate profitability in the US knows no bounds as cost-cutting amid 'slow' growth will fill the gap, we offer this quite compellingly nerve-jangling chart of the increasing dependence of S&P non-financial operating profits and the weakness of the US Dollar. The negative correlation between macro-level EPS and the U.S. dollar is both theoretically and empirically clear. As Citi points out, profits earned abroad are reported in depreciating or appreciating terms, boosting or reducing profits; and as the negative correlation between the USD and global growth can result in 'double counting' of earnings influences - this leads to too much hope at 'turning points'.

What is more critical is the trend higher in the USD - whether due to EUR break-up fears and safe-haven flows OR courtesy of Draghi's EUR weakening QE/LTRO promises - is tending to push Bernanke's hand to act to weaken the USD (do NEW QE) to 'strengthen' corporate profits and the economy. However, with inflation-expectations now high and macro data stabilizing, his justification is far from clear - no matter how high the hopes and dreams have become.

Without the Fed's NEW QE, the Q4 hockey-stick of hope in earnings is finished thanks to implicit USD strength. The irony us that time inflation is supply constrained - due to food limitations (global warming notwithstanding) - and adding QE 'demand' to that fire will only have potentialy violent repurcussions.

US corporate profitability has become increasingly dependent on USD weakness (implied by the Fed's QE actions)...

and as US macro surprises remain weak but have tended to stabilize/improve recently...

It seems like a much tougher call from the Fed to plunk down another $500billion at this time.

Source: Citi