End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns
Michael Smolyansky
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Michael Smolyansky: https://www.federalreserve.gov/econres/michael-smolyansky.htm
No 2023-041, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)
Abstract:
I show that the decline in interest rates and corporate tax rates over the past three decades accounts for the majority of the period’s exceptional stock market performance. Lower interest expenses and corporate tax rates mechanically explain over 40 percent of the real growth in corporate profits from 1989 to 2019. In addition, the decline in risk-free rates alone accounts for all of the expansion in price-to-earnings multiples. I argue, however, that the boost to profits and valuations from ever-declining interest and corporate tax rates is unlikely to continue, indicating significantly lower profit growth and stock returns in the future.
Keywords: long-run prediction; stock returns; equity premium; corporate profits; interest rates; corporate taxes (search for similar items in EconPapers)
JEL-codes: G10 G12 G17 (search for similar items in EconPapers)
Pages: 31 p.
Date: 2023-06-26
New Economics Papers: this item is included in nep-acc, nep-fdg and nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:96625
DOI: 10.17016/FEDS.2023.041
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