Fed Working Paper - 40% of real corporate profit growth after 1989 was fueled by a decline of interest rates and corporate tax cuts.

[daniellea]

@isaiah4031 In the optimistic scenario, if interest rates return to the low ones of the last decade (not pandemic low, but 2018 low), and if corporate taxes don't go up, then they should stagnate. But stagnating profits implies a falling stock market, because higher anticipated growth is priced into stocks.

But in the pessimistic scenario that Smolyansky favors, there was secondary growth from feedback: ie, the falling low rates and taxes didn't just let corporations keep more of their EBIT (boosting apparent growth via temporary windfall) but they also made EBIT grow more than it would have. So profits might fall.

But 'fall' and 'stagnate' are all relative to the baseline 2% GDP growth rate.

 

[fuzzie]

@daniellea They'll always find a way to do make the most money for the most part.

 

[isaiah4031]

@daniellea So I guess the takeaway is that the wind is no longer at the back of markets, but the market can stay irrational indefinitely until it doesn't. And P/E ratios can continue to rise to offset any potential EPS stagnation or falloff; until the market realizes that the growth is no longer there or fund flows shift.

 

[curiousdude]

@isaiah4031 There’s no irrational movement in a trillion dollar market IMO, fed controls tailwind/headwind via liquidity

 

[mezer15]

@curiousdude There are so many things that needs to be considered before that so yeah.

 

[creexpl]

@daniellea

if interest rates return to the low ones of the last decade (not pandemic low, but 2018 low), and if corporate taxes don't go up, then they should stagnate

If we're talking about s&p, EPS should continue to trend up because of reinvested earnings, particularly with buybacks being so much more prevalent. Total stock market earnings might stagnate relative to total economic growth, but stock growth has and always will be driven from reinvested earnings as well.

https://www.multpl.com/s-p-500-earnings

You can see from that even if you ignore the last 30 years, eps adjusted for inflation trends up historically speaking.

 

[jvk1214]

@isaiah4031 Is this good news for everyone? Or Is It Bad News? What do you think? I also want to know the answer from you.

 

[isaiah4031]

@jvk1214 There is no good or bad news.

There is just what is.

Too much to discuss and elaborate on.

The best thing to do is either create a plan and stick to it or be flexible. Personally, I'm flexible. But that requires knowledge, time, patience, and a level of emotional effort that few have. Most people should just DCA, focus on their financial budget, and do things like minimize taxes.

As it relates to this situation, I'm focused on companies that people don't generally know that have good prospects relative to their price and are in more stable industries that can do well during a recession. Which means my investments underachieved the Nasdaq so far this year because I'm not investing in companies like Apple and Nvidia; which I think are overvalued and could fall by 50-75%. I like fixed income right now; not because I think central banks will lower interest rates quickly. But because the risk vs reward they provide is good when compared to the situation that OP outlined.

Hopefully that helps feed your curiosity about what my opinion is. But what's most important is what you're good at and how you should take advantage of that capability.

 

[marina45]

@isaiah4031 Yep, you cannot really put it in those terms so there's that.

 

[ha6enti]

@jvk1214 Well it depends, sometimes it can be good but mostly it's bad.

 

[paladius]

@daniellea This is exactly why I overwhelmingly favour dividend paying companies. The whole "dividends are irrelevant" crowd is about to learn what happens when interest rates are not held near zero forever.

 

[unitedwestand000000]

@paladius

This is exactly why I overwhelmingly favour dividend paying companies. The whole "dividends are irrelevant" crowd is about to learn what happens when interest rates are not held near zero forever.

i don't understand why you think this. dividends are just a way to pay out profit (and less efficient in a taxable account)- if a company stops making profit or profit decreases the dividend will 100% be adjusted and companies that pay out dividends arent inherently more profitable or something .

'dividends are irrelevant' is 100% the correct response to people who specifically chase dividends.

 

[amberemilee]

@unitedwestand000000 Executives have a tendency to over-invest (empire building) and they do destroy value from time to time. It is not by accident that the layoffs started at big tech firms that hoarded workers during the boom and financed dead end pet projects. Instead, they could have distributed earnings to shareholders.

Dividend distribution is an effective control mechanism preventing executives from treating cash flow as their own. It's not black and white as you portray it to be.

 

[resjudicata]

@unitedwestand000000 Aristocrat companies will literally fire everyone or takeout a massive amount of debt before they fail to increase their dividend. Much less cut the dividend. If anyone actually lowered their dividend it’s signaling legitimate decline and closure

 

[felipe1]

@resjudicata Killing your company to pay dividends is hardly a great idea

 

[kexonplastic]

@felipe1 And yet Jeff Gardner is still putting around. Currently as CEO of CalAmp after a brief stay at Brinks which came after getting fired from Windstream after putting that company on the path to bankruptcy by refusing to perform capital investment in the name of keeping the dividend.

 

[jackman915]

@resjudicata That shows poor management practices, then again aristocracy was not known for its long term wisdom.

Firing too many people and taking on massive amounts of debt is what private equity locusts do, and they depart leaving husks of formerly effective companies.

 

[paladius]

@unitedwestand000000 Stock prices are forward looking, and reflect not just existing revenues, but expected ones. And when that expected growth doesn't materialize, stock prices come crashing down to earth.

When interest rates are low, the market applies a very low discount rate to expected future cash flows. Ben Felix - ironically the person best known on this Reddit forum for proclaiming the irrelevance of dividends - has a video talking about large cap growth stocks, and how the expected uncertainty of future profits drives up stock prices thanks to the concave nature of the returns curve and because of something called Jensen's inequality.

When interest rates remain high, those expectations of outsized returns vanish. Dividend paying stocks on the other hand, are like the line from Jerry Maguire - "show me the money". These are stocks that are down to earth, and will perform as equities should in a normal interest rate environment.

History is a good guide here. Look at the performance of dividend paying stocks during the stagflationary crisis of the seventies and during the dot com bust of the 2000s.

Personally, I invest based on the Gordon equation (another equation that Ben Felix talks about). No dividends? Then your company is worth zero.

 

[puretruth7]

@unitedwestand000000

if a company stops making profit or profit decreases the dividend will 100% be adjusted

Not at all 100% - dividends are paid out of cash flow, not profit.

Paper gains representing years of growth can be erased but the dividends are in your pocket already.

Dividends are extremely efficient in the sense that smaller investors are better able to allocate small amounts of capital, as opposed to large corporations who need billions to move the needle. Large companies in aggregate may be forced to match the GDP growth rate rate, but that is not the case for individuals.

 

[winlifeoc]

@puretruth7 If you pull the money out. If you reinvest it back into the same security - you just lost the tax efficiency of a buy back with no other gain.