A couple of insightful posts by Sudden Debt here and here elucidate how dependent the US economy has become on a growing financial sector:

About 20% of S&P 500 by capitalization and 30% of earnings are made up by financial shares. Add the finance arms of industrial cos. like GE, GM and Ford and some 35-40% of all S&P 500 earnings are made up of purely financial activities. Not exactly happy times there, right now.

Corporate profits have been able to rise 12% a year since 2002 thanks to robust financial earnings:

Graphic by WSJ.com

But as the following graph shows, financial companies have used increasing leverage to grow earnings:

Graphic by Sudden Debt

If the current liquidity crisis persists for a while longer, then financial earnings will no longer rise and may actually decline. And I don’t see how the S&P 500 will rise to new highs if its most important sector is contracting.