Highlights include American International Group, Inc. (AIG), Citigroup, Inc. (C), General Motors Corp. (GM) and Ford Motor Co. (F).

As we head into earnings season, it seems clear that we are in for another quarter of rough sledding. As things stand now, the total net income for the S&P 500 is expected to be 27.5% lower than in the first quarter of 2008. This is after a very large increase in the expected profitability of the mega-banks for the quarter -- one that appears tied to the change in mark-to-market rules, which improves accounting profits, but does nothing to help economic profits.

Still, this will mark a major improvement over the fourth quarter, when the total net income for the 500 firms fell by 62% excluding extraordinary items. Much of that was due to exceptionally large losses in firms like American International Group (AIG) and Citigroup (C).

Let us pray that AIG does not deliver another $61 billion dollar loss ($35 billion excluding extraordinary items). On the other hand, we could be looking at some very large losses at firms like General Motors (GM) and Ford (F) this quarter.

Those sorts of numbers however, give support to the idea that corporate profits are severely depressed and that investors need to "look across the valley." However, the data really do not support that view. It's not that current profits are abnormally low -- but they were coming off of abnormally high levels.

The graph below looks at the government's measure of corporate profits after tax. It's not the same thing as the S&P 500 earnings, but it's a pretty good proxy. Since the first quarter of 1951, corporate profits never exceeded 8% of GDP until the first quarter of 2005. Profits eventually peaked out at 10.89% in the third quarter of 2006. They were above 10% of GDP for nine straight quarters.

Prior to the first quarter of 2004, profits had only exceeded 7% of GDP in seven quarters, almost all of them during the Carter Administration. The average over the whole period shown is 5.87% and the median is 5.80%, and that includes the abnormally high levels of a few years ago. In the fourth quarter of 2008, they fell all the way back to the "extremely depressed level" of 6.56%, which is higher than 78% of the historical quarters.

I see no particular reason why corporate profits share of GDP is likely to go back to the extreme levels that we saw between 2004 and 2007. It seems more likely that they will fall to more historically normal levels. In short, this valley could be a very wide one, sort of like the Mississippi watershed.

How deep a valley is still unknown, and let's hope that we do not see profits as a share of GDP fall to the levels seen during the Reagan Administration, when they averaged only 4.2% of GDP. If that were to occur, P/E ratios at current market levels would be extraordinarily high.

"Depressed"? It all depends on your perspective and what you are comparing it too. Yes, relative to the past few years, profits are depressed, but don't mistake the last few years for being normal.