The Future of Corporate Profits: The "E" in the P/E Equation Posted on Feb 8th, 2007 http://usmarket.seekingalpha.com/article/26511 A great, short explanation: Vitaliy N. Katsenelson, CFA submits: I wrote this article last year, on the risk that high corporate margins present to investors. Here is updated excerpt from that article: Todayâs stock market valuation is higher than it may appear. As margins revert to the historical average (and they always do), corporate earnings growth will either decelerate â disappointing Wall Street expectations of 8% earnings growth (according to First Call) for the S&P 500 over next five years â or decline, driving earnings, the âEâ in the P/E equation, down. The broad market index fund investor may be in a pickle when a cheap market suddenly becomes more expensive. If todayâs corporate profitability reverts to the mean profit margins observed over the last 25 years (8.8%), corporate profits would decline almost 31%.