Michael Smolyansky, a senior Fed economist, claims corporate profit growth will slow appreciably. His case rests on corporate tax rates and interest rates. Access to his white paper, The coming long-run slowdown in corporate profit growth and stock returns, can be found here.
As if his case was not strong enough, we provide other supporting evidence, including the newfound leverage of employees and labor unions, deglobalization, and long-term economic growth trends.
In the long run, stock prices and returns have a fundamental anchor in the cash flows that companies ultimately provide investors. If profits grow slower than expected, stock return projections must be recalibrated.
Summary of the Fed’s Article
Michael Smolyansky leads his article with the following paragraph:
Over the past two decades, the corporate profits of stock market-listed firms have been substantially boosted by declining interest rate expenses and lower corporate tax rates. This note’s key finding is that the reduction in interest and tax expenses is responsible for a full one-third of all profit growth for S&P 500 nonfinancial firms over the prior two-decade period. I argue that the boost to corporate profits from lower interest and tax expenses is unlikely to continue, indicating notably lower profit growth, and thus stock returns, in the future.
He presents the following graphs to support his case.