Revenue gains may push S&P 500 profits to $99.08 a share this year, up 17 percent from 2010, after rising 37 percent a year earlier, the biggest two-year expansion since 1995, analyst estimates compiled by Bloomberg show. The gauge has traded at an average 15.7 times reported earnings since the start of 2010, or 15 percent below the average for the rest of the past 10 years.

"Due to the stubbornly high unemployment, lack of economic clarity and questionable self-sustainability, the multiple needs to come down," said Chad Morganlander, a Florham Park, New Jersey-based money manager at Stifel Nicolaus, which oversees $110 billion. "Margins have reached the crescendo, so any improvement with earnings will be pushed through with sales growth. But the economy suggests only a modest improvement in sales, and so earnings improvement should be modest at best."

Employment Report

The S&P 500 tumbled as much as 7.2 percent after reaching an almost three-year high of 1,363.61 on April 29, driven by government reports showing U.S. employers added 67 percent fewer jobs than economists forecast in May and producer prices rose at twice the expected rate. At 39 days, the decrease is the second longest since the bull market began, Bloomberg data show. Consumer spending unexpectedly stagnated in May, marking the weakest outcome since June 2010, Commerce Department figures showed today.

Shares broke a four-day winning streak on June 22 after the Federal Reserve cut its forecast for growth and employment in 2011 and 2012. Risk signals for financial stability in the euro area are flashing "red," European Central Bank President Jean- Claude Trichet said that day.

The U.S. economy grew 1.9 percent last quarter, a slowdown from 3.1 percent at the end of last year. Unemployment unexpectedly climbed to 9.1 percent in May, homebuilder confidence plunged to the lowest level in nine months and economists cut their estimates for 2011 gross domestic product growth to 2.5 percent from 3.2 percent in February.

'Derisking and Deleveraging'

"We're seeing a tightening in financial conditions, derisking and deleveraging," said Doug Noland, the money manager for Pittsburgh-based Federated Investors Inc.'s Prudent Bear Fund, which oversees $1.3 billion. "The markets are starting to recognize this. They're recognizing we need to bring down these multiples because the environment is so uncertain."

Peak profit margins haven't always signaled the end of equity gains in the past, data compiled by Bloomberg show. The last time corporate profitability reached a high was in January 2007, before the S&P 500 advanced 10 percent through October, the data show. In the same period, U.S. government bonds returned 5 percent, while bonds for American companies added 3 percent, according to Bank of America Merrill Lynch data.

Margins rose to a record 15.6 percent in 1999, when the benchmark gauge for U.S. equities rallied 14 percent through March 2000. That time, Treasuries rose 1.5 percent, and corporate bonds lost 0.24 percent. The S&P GSCI Total Return Index of 24 raw materials outperformed equities in both periods, advancing 23 percent in 2007 and 38 percent in 1999.