End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns

31 Pages Posted: 30 Aug 2023

See all articles by Michael Smolyansky

Michael Smolyansky

Board of Governors of the Federal Reserve System

Date Written: June, 2023

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

JEL Classification: G10, G12, G17

Suggested Citation

Smolyansky, Michael, End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns (June, 2023). FEDS Working Paper No. 2023-41, Available at SSRN: https://ssrn.com/abstract=4552509 or http://dx.doi.org/10.17016/FEDS.2023.041

Michael Smolyansky (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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