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The coming long-run slowdown in corporate profit growth and stock returns [pdf] (2023)

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Re: The coming long-run slowdown in corporate profit growth and stock returns [pdf] (2023)

#11

Post by chrisco255 »

It's worth noting this is just one person's opinion, it's not an opinion of the Fed itself. The paper analyzes corporate profits on the basis of interest and tax rates alone, but ignores other monumental shifts in global markets over the past few decades like globalized supply chain networks. It's probably true that the efficiency gains from globalization have already passed their peak, but that would have as much of an impact on declines in profit growth rates as any other factor.

The article also ignores technology as a factor. If globalization is at its peak, automation is probably still in its infancy. Robotics and AI are rapidly advancing and it's going to have a substantial impact to supply chains and labor markets over the coming decades, regardless of what happens with interest rates.

Re: The coming long-run slowdown in corporate profit growth and stock returns [pdf] (2023)

#14

Post by financiergoose »

GenerWork wrote: post #10
financiergoose wrote: post #5

I'm sure absurd parasitic government interference, lawfare, and shareholder activism in public corporations has nothing to do with all the good companies going private, ergo smart people telling the lawyers to go to hell, old people with pensions hardest hit.

At this point, I'm not sure why you'd want to go public unless it's simply to cash out ASAP. Everything you just described seems like major hell to deal with.

I'm a founder, and I have zero intention of ever going public for these exact reasons.

Re: The coming long-run slowdown in corporate profit growth and stock returns [pdf] (2023)

#17

Post by [deleted] »

chrisco255 wrote: post #11

It's worth noting this is just one person's opinion, it's not an opinion of the Fed itself. The paper analyzes corporate profits on the basis of interest and tax rates alone, but ignores other monumental shifts in global markets over the past few decades like globalized supply chain networks. It's probably true that the efficiency gains from globalization have already passed their peak, but that would have as much of…

[deleted]

Re: The coming long-run slowdown in corporate profit growth and stock returns [pdf] (2023)

#18

Post by w10-1 »

Data is based only on non-financial firms; I wonder what is the effect size of this exclusion. Economy said to be migrating up the value chain to financial services and using pervasive financial engineering, in GE, pharma, fintech, etc. The prospect of higher interest and more taxes would drive more such engineering.

Another question is the stock value loss attributable to dwindling market competition depressing innovation and demand.

Another is demand for stock: P/E multiples going up while most people are under increasing economic stress and lower investment puts all the burden on current stock owners to reinvest, but asset-weighted individual investors might be aging out.

Again, unclear effect size to all this. Hard to imagine being an economist.

But in any case signaling that US stocks long-term are likely to be bad seems counter-productive except as a threat to the incoming administration against increasing rates and taxation.

Re: The coming long-run slowdown in corporate profit growth and stock returns [pdf] (2023)

#19

Post by jmoak »

This seems to have proven that growth leads to higher earnings and equity prices.

Of course less taxation and a drop in interest rates will lead to more earnings over time and higher valuations. The crux is that he frames the drop in interest rates as a matter of "luck", as if the government just happened to be dropping them, as opposed to the government reacting to the drop in good/service prices by lowering rates, as a result of innovation, to maintain price stability and the 2% inflation target.

Company A makes more of Good #1 for less money due to Innovation X, and can charge less money. When this occurs across the entire economy, the fed has to drop rates to prevent broad deflation in prices. Lower rates show up as more earnings. The alternative with fixed rates would be that Company A's revenue, after its impressive innovation, would remain roughly the same (or fall) while its competitors' revenues fall (more). The real (adjusted) growth in equity prices, earnings, and revenue would still be going up at the same rate IMO.

It's entirely possible (maybe not likely) that a landmark innovation could deflate prices for most goods in the future and bring us back to low or even negative rates, which would (per his measurements) show up as higher earnings and equity prices.

Maybe I don't know what I'm talking about, but this paper seems circular to me. What would be more compelling is an analysis on the future of goods/services availability, as interest rates and taxation are downstream of those. For example, what does China's potential decline forebode for good availability? What about the hyped up potential panacea of AI?

Re: The coming long-run slowdown in corporate profit growth and stock returns [pdf] (2023)

#20

Post by intuitionist »

feedforward wrote: post #13

There was an economist who predicted this in the 19th century https://en.wikipedia.org/wiki/Tendency_of_the_rate_of_profit...

From the abstract, the paper’s argument looks to be entirely different and reaches different conclusions than a Marxian TRPF argument. This paper claims that net profit margins have increased over the past few decades (which is certainly true at least for S&P 500 companies) and that the increase is mostly driven by lower interest expense and lower corporate taxes. If interest rates and tax rates can’t or won’t fall any further, then they won’t provide a tailwind to margins, and so corporate profits will grow much more slowly (not necessarily decline!) over the next few decades.

Marxian economists generally speak of the TRPF as a decline in return on invested capital, which doesn’t come into play in this paper at all AFAICT, but they also have a bad habit of confusing ROIC with profit margins, which is what the paper is all about.

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