Long-Term Trends And Sources Of Corporate Profitability Growth

The current level and sustainability of corporate earnings has been discussed in many posts on this site.

A Wall Street Journal article of June 1, 2014, titled “Per-Share Earnings Growth Could Slow in Coming Years” discusses various drivers of corporate earnings growth over the long-term, and factors that will impact this growth going forward.

An excerpt, referencing data compiled by Research Affiliates, incorporate data from all companies, using data from the Commerce Department’s Bureau of Economic Analysis (BEA) :

Over the 50 years through year-end 2013, after-tax corporate profits rose from 6.9% of GDP to 10.2%. Roughly speaking, two-thirds of this increase reflects falling taxes, while one-third came from rising profitability.

The top corporate-tax rate was cut periodically throughout the 50 years, while the surge in profitability appears to date from the early 1990s. Indeed, since 1991, earnings per share of the S&P 500 companies have grown 8.7% a year, far ahead of the 4.7% nominal GDP growth rate.

Another excerpt, quoting Robert Arnott:

“Over the past eight to 10 years, the rubber band has been stretched, with profits abnormally high relative to GDP,” he says. “Historically, you end up with zero real earnings growth over the next 10 years when the rubber band has been stretched this far.”

Additional details can be seen in the Wall Street Journal article mentioned above.


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ProfitabilityIssues.com is published by StratX, LLC (stratxllc.com).  StratX, LLC is a management consulting firm and strategic advisory that focuses on the analysis of current and future business conditions, and given these conditions, offers corporations and businesses advice, strategies, and actionable methods on how to optimally increase revenues and profitability.