In my last post I said that, with interest rates, tax rates and real wages at historic lows, corporations are likely to make fat profits over the next few years and stocks remain reasonably buoyant. But at least one of these factors can be expected to change.
- Recovery of the housing market would cause the Fed to lift interest rates;
- Revision of the tax code by a President who can work with both sides of the House; or
- A dramatic fall in exchange rates placing upward pressure on wages as manufacturers regain export markets.
What I did not emphasize is that none of the above are likely to occur without a strong economic recovery — and the net effect of any change could well be a boost to corporate earnings.
What also dawned on me after reading The Inequality Puzzle by Larry Summers is that there may be a common thread. The impact of new technologies over the last two decades and access to cheap labor through increased globalization may have created a sustainable increase in corporate profits as a percentage of GNP. Could this time really be different? Only time will tell. I will be watching sales growth and profit margins over the next few years with interest.
Colin, good series! I was just re-reading these posts and I have been thinking about your comment about requiring a strong recovery. It is hard to imagine a strong recovery without a change in consumer spending patterns. And this may require the completion of the consumer deleveraging process in another 5 (?) years.