It's not just the potential actions of the Federal Reserve that should worry investors, according to former Goldman Sachs economist Gavyn Davies, writing in the Financial Times. "The fundamental earning capacity of corporate America" is about to be "found wanting".
Take a look at the annual contribution that company profits make to GDP (broadly, a measure of national wealth) over the last century and you will find that it fluctuates around a pretty constant average. However, in recent years corporate profits as a share of GDP have risen sharply "above previous peaks". Why? Because at the same time the share of GDP accounted for by wages has been falling to "unprecedented depths".
According to the International Labour Organisation, a UN agency, the share of GDP in the advanced economies accounted for by gross profit has risen by about 10% of GDP over the past 30 years. The wage share has fallen by about the same amount. So shareholders have enjoyed a windfall as firms have grown output per head while shrinking real' (after-inflation) wages. Put bluntly, firms have squeezed more juice from their lemons than ever before.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
How much more? Davies estimates that if that 10% drop in the wage share of GDP had not occurred, and everything else had stayed the same, then net corporate profits would be up to two-thirds lower than they are today. The reasons behind this shift are complex technology, globalisation and a reduction in labour bargaining power have all played their part.
But one thing's for sure: should this decline in wages reverse and most trends "mean revert" eventually equity markets could be very vulnerable indeed.
-
Why Chinese stocks are so far out of favourThere’s little appetite for Chinese stocks despite low valuations.
-
The 62 UK areas where you could be priced out of using your Lifetime ISASaving for your first home in Croydon, Ealing, Brent or any one of these other locations? You could be at risk of being priced out of using your Lifetime ISA
-
A new dawn for Asian markets?Advertisement Feature James Thom, Investment Manager, abrdn New Dawn Investment Trust plc
-
The end of cheap money hits the marketsNews Markets have swooned as central banks raise interest rates, leaving the era of cheap money behind.
-
Are stocks back in a bull market or is this just a bear market rally?News The S&P 500 index gained 17% between its June lows and 16 August, while the Nasdaq Composite rose more than 20%. So are stocks back in a bull market or is this just a brief rally before they resume their slide?
-
Enjoy the bear market rally while it lastsNews Investors seem to think that a weaker US economy will cool inflation and see the Fed relent on interest rate rises. But that optimism may be misplaced, with July’s stockmarket gains looking very much like a bear-market rally.
-
The Fed really is fighting inflation – so don’t expect an early end to the bear marketAnalysis In an attempt to contain raging inflation, the Federal Reserve has raised US interest rates by 0.75 percentage points. And it’s going to keep on raising them till something breaks, says John Stepek.
-
The Federal Reserve wants markets to fall – here’s what that means for investorsAnalysis The Federal Reserve’s primary mandate is to keep inflation down, and lower asset prices help with that. So, asks Dominic Frisby – just how low will stockmarkets fall?
-
Interest-rate rises mean more pain for stocksNews Interest rates are rising around the world as central banks try to get inflation under control. That’s hitting stockmarkets – and there is more pain to come.
-
Here’s why markets welcomed America’s big interest rate riseAnalysis The US Federal Reserve raised interest rates by half a percentage point – the biggest hike in 20 years. So why did markets rise? John Stepek explains what's going on, and what it might mean for you.
