We enter earnings season with the Dow (DJI) and S&P 500 (^GSPC) having recently passed their all-time highs. One of the narratives for why the markets keep rising (aside from the Fed’s easy money policies and optimism about a U.S. economic recovery) is strength in corporate profits and earnings. Meanwhile, there are warnings coming from some commentators of a bubble in stocks or a bubble in bonds, or a bubble in certain areas of the credit market.

Fund manager John Hussman wrote in a recent weekly market commentary, "the real hook, in my view, is the absence of a bubble in any individual sector, and instead a bubble in profit margins across the entire corporate sector.”

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According to Hussman, corporate profits are near 11% of GDP and 70% above the historical norm. (Hussman agrees with Warren Buffett that one has to be wildly optimistic to believe corporate profits -- as a percent of GDP -- can hold above 6% for a sustained period.)

So what’s the catalyst that will drive corporate profits over the cliff?

"Even marginal improvements in the federal deficit and in household savings, which are necessary because of the debt burdens households have taken on…we are likely to see -12% earnings growth annualized over the next three to four years - in other words substantial weakness in corporate profits," Hussman tells The Daily Ticker. We sat down with him at the 2013 Wine Country Conference benefiting the Les Turner ALS Foundation.

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Here’s Hussman’s rationale. He says the deficit of one sector has to emerge as the surplus of another sector. Record deficits for households and the government combined have to show up as a surplus somewhere. Hussman argues that we see a mirror image of record deficits for households and the government, and record surpluses at the corporate level as a fraction of GDP.

Hussman describes the current stock market as “overvalued, overbought, and overbullish" -- an environment where stocks can creep higher but crash for no good reason.

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That said, it’s been a tough last year for some Hussman funds. For example, the Strategic Growth Fund is down more than eight percent over the past 12 months.

“A good portion of that is on the stock selection side, where we are in somewhat more defensive stocks,” Hussman tells us in the accompanying interview. “We are not in homebuilders, financials, materials, cyclicals.” Hussman believes QE has encouraged speculation on these “new economies.”