In my last post I concluded that the same factors driving rising inequality — new technologies and access to cheap labor through increased globalization — may also be driving a sustainable increase in corporate profits. While we may be understandably wary of “this time is different”, consider the following:
The rise of China as a trading partner over the last two decades.
Corporate profits at 11% of GNP suggest a new paradigm when compared to the historic (normal) range of 5% to 7%.
The decline in employee compensation as a percentage of corporate value added mirrors the rise in corporate profits.
And Robert Shiller’s CAPE, normally used to argue that the market is currently overpriced. If we stood in 1994 and looked at the range of CAPE values for the past century, we would no doubt have concluded that a CAPE value greater than 20 indicates the market is overpriced. In the last two decades, the CAPE only briefly dipped below 20 at the height of the global financial crisis. Now pundits argue that a CAPE value greater than 25 indicates the market is overpriced. Something has definitely changed.
Whether the change is sustainable, only time will tell. But one thing is clear. Of the 466 corporations who have so far reported earnings for the first quarter 2014, 77% have either beaten (68%) or met (9%) their estimates. Corporate profits are not in imminent danger of collapse.
Thanks Colin, a beautiful set of numbers as Paul Keating would have said.
Regards Vasso Masssonic
yeah, but reported earnings can be distorted by buy-backs and whole host of gimicks, the true number is the top line growth to guage demand- after all that’s the only way for companys to show real growh. if i ain’t there, all the gimicks in the world will become a joke!!!
Buybacks are not a gimmick: they do boost earnings (per share) and deliver real value to shareholders. But you have a point, earnings cannot continue to grow without sales growth. Lower employee compensation means lower (collective) consumption and consequently sales, unless: (1) offshore sales (either exports or sales of goods manufactured offshore) rise to counterbalance increased imports; (2) increased profits are distributed to shareholders; or (3) increased profits are reinvested.
The high inflation years should be excluded from any chart using corporate earnings due to the extreme distorting impact of high inflation on historic cost accounts.
and there are more people than there are jobs
What’s the saying, when the VIX is low it’s time to go or in the month of May it’s time to go away? Has the the Summer rally already happened?
Our research shows the opposite: when the VIX is high its time to fly (away).
anyone can see the markets are propped up
If it was that obvious everyone would have sold their stocks and shorted the market (i.e. the market would have already crashed).
present conditions bear all the hallmarks of the 1929’s collapse where everyone and his cousin.. are scrambling into buying at all time highs and holding high…on margins
I thought we had dispelled that myth.
I agree we should watch margin debt as it tends to reverse before the broad market, as this chart from dshort.com shows.
But there is no down-trend at present. And $400 or $500 billion is no magic ceiling, representing only 2.4% to 3.0% of NYSE market capitalization. So not quite everybody is leveraged up to their eyeballs.
The second to the last chart is stunning. It appears that a peak is reached during recessions, after which (in almost every case) there’s a severe drop.
One could argue that when the numbers reverse themselves or head upwards, we’ll be heading into another recession within a few years, BUT since we’re no where near that point, all is well.
The peaks are because total value added by business falls faster than employee compensation during a recession, despite layoffs. At present, value added by business is growing faster than employee compensation; so risk of recession appears remote.
all the result of extreme greed