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As I understand the case for the U.S. stock market as a whole being
significantly overvalued, it is based on the assumption that
above-trend corporate earnings must inevitably return to the trend
line. Wary as everyone is of the "This time it's different" mantra,
this piece makes the self-evident case that the increase in corporate
profits has come largely from increases in productivity, or, to put it
another way, decreases in labor costs.
If that's true, doesn't one have to be able to envision labor regaining
leverage to assume that corporate earnings return to the trend line?

I'm a big proponent of the "broad US equities are overvalued because profits this high won't last" school.

But my view is that there is a difference between reversion to the long
run mean of corporate profits and reversion to the trend line.
This is true whether it's in real dollars or as a share of GDP.
Even if there is a long term trend of labour getting less and less of the pie,
at least a reversion to that trend line would seem to be a conservative assumption.

If you make an assumption that the trend of real corporate earnings
will continue to rise higher and higher at a rate greater than real GDP
growth as it has been in recent decades, current real corporate
earnings are still around 25% above even that rising trend line.
In round numbers we're seeing $88 earnings for the S&P 500 while even
the rising-much-faster-than-GDP trend would indicate around $70.
There is no need to assume that corporate earnings will fall to their
long run average as a share of national income to make a case that earnings
are unsustainably high right now. Heck, there's always another recession coming.

FWIW, automation is a big issue but I think the falling share of US
national income going to labour has more to do with a billion or two
poor people being able to enter the global labour market in away that
competes with until-recently overpaid blue collar people in rich countries.
US assembly line workers were probably never worth $40,000+ a year.
I think we are perhaps coming to the end of a one-time historically anomalous
period that people with few skills could get high incomes in rich countries.
On this view the recent decline in the share of US national income going
to labour is the reversion to the long run mean and the previous
high level was an interesting but ultimately unsustainable exception.

A lot of interesting discussions come out of trying to distinguish between cycles and trends!

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