The flatter yield curve has an odd mix of effects. All else held equal, it should lead to slower real GDP growth with five-quarter lag. As the curve started to flatten in 2003, we are in that slowing growth period already. We should also see declining corporate profits as a percentage of GDP with a 4-quarter lag, and that is happening, too. And financial profits as a percentage of total corporate profits should decline with no lag. Check. But here's the fascinating part: Previous yield curve flattenings have not killed either the stock market as a whole or financial stocks in particular. We went through a protracted flattening of the yield curve - not as dramatic as the current one - in the late 1990s, and stocks did quite well then with the S&P Financials outperforming the broad market. It is all an odd mix, isn't it? Just as stock and bond futures are not GDP futures, the performance of individual equities and equity sectors are not as linked to profits as we might suppose. Bank profits have been pinched by the flattening yield curve and the squeeze put on leveraged carry trades, true, but has this come from a decline in their interest rate spread margin or from a decline in their trading revenue?