Are corporate profits anomalously high, and will it last? Or revert?

[jlkuhioe]

@sadie08 Correct me if I'm wrong too but wouldn't companies be able to refinance their previously higher rates to something lower when it was available? Not a subject I have a lot of personal knowledge on

 

[konsciencia]

@daniellea The Fed has the answer. See the article for the charts and further explanation but the data and article linked below explains most of the gap.

The difference between EBIT growth and sales growth (3.6 percent vs. 2.0 percent) can be attributed to an improvement in profit margins. In other words, costs grew at a slower rate than sales. Some of the improvement in profit margins may have come from sourcing cheaper inputs from abroad, enabled by increased globalization. Moreover, for output produced within the U.S., growth in labor productivity—i.e., real output per hour worked—exceeded real wage growth since the mid-2000s.9 This means that, for a given cost of labor, firms were able to produce more output, which would also likely have contributed to the improvement in profit margins.10

https://www.federalreserve.gov/econ...profit-growth-and-stock-returns-20220906.html

 

[daniellea]

@konsciencia That's a good answer, and also worrying for me as an investor, because we can only source so much more from abroad (max: 100% of inputs).

The labor productivity is sustainable if driven by long-term automation trends.

The other problem is that companies have pocketed these extra earnings, rather than passing them to workers. Shaerholders might not mind so much, but unions and the politicians they support might try to turn this around.

 

[konsciencia]

@daniellea And we are countertrend on inputs.

We are uncoupling external inputs and there is a clear policy moving towards domestic production and a rebasing of manufacturing in India, Mexico and in the US domestically. Follow Apple. Follow Germany.

Just look into the natural gas powered German factories being set up in Mississippi and Louisiana and thereabouts to understand it’s going to take a few years and the impact is real — cheap Gas for Europe is over, a bipolar world system is emerging, German manufacturing won’t be in a position to replace latent demand from a generally decoupled China, and we’re in for a rough rebuilt. And don’t forget China’s pretty massive upcoming demographic explosion.

On the other side? After a few years? There’s a new golden age with lower inflation, domestic production, massive investment into Mexico and domestic US supply chains for manufacturing, a resultant commodity boom, and technology fueled growth with mfg4.0 and AI. But the next few years are on the wall.

And then there the issue we’re talking about here.

There is good reason to be cautious, even beyond the fallout from low interest rates, MMT and the continued mishandling by the Fed.

This one cracked me up:

https://imgur.com/O7m8IRy

Edit:

https://imgur.com/MwRjqIt

 

[resjudicata]

@daniellea To me it seems obvious that the next 10 years will not average 10%+ a year.

The long term drift use to be said to be 7% but the previous decade was such a golden era it pulled up the very long term drift.

I think the CAPE tells you everything you need to know but it plays out on such an incredibly long time frame. Yea it felt really good during that spike in the CAPE In 2000 but it literally is like a night of drinking at the bar. It is interesting that we have the concept of economic recovery and that things will get better when they are bad but we have no concept of the opposite. Maybe it is deeply rooted in human optimism combined with human denial.

This is all separate from the investment decision though. With all that said I am not sure what is a better investment decision than SPY for the next 10 years.

 

[daniellea]

@resjudicata I should point out that 10% has been the nominal return for these funds, so real returns have been more like 8%, which is closer to the historical level of 7 real returns or so. But the historical level of 7% returns is associated with a P/E=16 (crudely, 1/16=6.25%), so the returns have been too high for the P/E we've seen.

 

[outlawingrace]

@resjudicata Hard tilt to value + profitability factors

 

[baongoc1990]

@daniellea Why are you using data throigh 2021? Profit margins fell over 15.5% last year in the US.

 

[ghackman]

@baongoc1990

Profit margins fell over 15.5% last year in the US.

How can this be if my grocery bill increased by almost 50% for the exact same items and companies are reporting record profits, some finally being profitable since their inception in the late 2010s?

 

[baongoc1990]

@ghackman Companies were reporting record revenues, not record profits last year.

Revenues minus expenses equals profit.

If expenses increased at a rate faster than revenues, profits will fall on a relative basis.

Just like you experienced inflation, so did companies. People spent a ton more money but companies had higher expenses, so they didnt benefit as much in 2022 as they did in 2021.

 

[druzemar]

@ghackman Because it costs them more money to supply groceries. No grocery company reported record profits in 2022

 

[ghackman]

@druzemar I'm not complaining about the stores like walmart. I'm complaining about the suppliers like McCormik, Kraft, Nestle, etc

 

[natalya1]

@ghackman They only reported record profit because they likely buy their inputs on contracts, which were signed before the inflation kicked in. It's likely producers of these inputs took it on the chin, since they were obligated to supply at 2022 prices while things like fuel, fertilizer, labor, and interest on capex all spiked.

 

[druzemar]

@ghackman It costs them more to procure the ingredients to make the food dude lol. That’s how the economy works. The lack of labor, lack of production due to global Covid fears/delays in process, etc all increase the cost of supply. That’s why there’s inflation

 

[mickiel]

@ghackman why are you looking at your grocery bill and not PMs

 

[ghackman]

@mickiel Because my grocery bill is most relevant to my day to day life. Haven't gotten a raise in a year or so, but in that same time, my average grocery bill increased 20%. Basic things like spices doubled in cost while more expensive things like beef went up only 5%. Grated cheese costs more than ungrated cheese now, when it used to be the opposite.

Profit margins don't matter to me when I know theyre making enough to pay their workers more but won't. They don't matter to me when they have no impact on a companies outlook on pay, sales, etc. Everything is increasing in prices but they won't pay their workers more. Rent increased, on average, 30% over the last 12 months and 50% over the last 2 years, but they won't pay their workers more.

 

[janeway]

@ghackman OK but that doesn't tell you anything about a company's profit margin

 

[ghackman]

@janeway But the profit margins don't matter to me when I'm not benefiting from it. I'm actively losing at life because of them, suddenly, raising their prices. I know damn well they didn't raise the pay of their employees. So where is all the money going?

You can't honestly sit here and say that the cost of growing food has increased that much when the price of water has remained stagnant for the last decade.

You can't honestly sit here and say that the cost of shipping things increased 50%.

You can't sit here and say that the cost of their labor went up when their wages have remained stagnant or, at most, increased by 5% because the workers had a union and demanded a wage increase.

And worst of all, you can't honestly expect me to believe their costs of all of that combined increased 100% for basics. You can't sit here and honestly tell me that. You especially can't tell me that after admitting the last time I saw you that companies got billions in profits, not revenue but profits.

When people cop out and say that these companies profit margins are razor thin, it's embarassing to know that they said that these companies' profit margins can cover almost their whole business. They could literally buy their business again with just 1 year of profits. How is that not obvious price gouging?

 

[janeway]

@ghackman What companies are you referring to? I'm not aware of any turning profits that high. I'd love to invest.

 

[ghackman]

@janeway

https://www.reddit.com/r/investing/comments/10rq9r6/_/j6zd734