The Future of Corporate Profits. The “E” in the P/E Equation

As margins revert to the historical average, corporate earnings growth will either decelerate — disappointing Wall Street expectations of 8% earnings growth for the S&P 500 over next five years — or decline, driving earnings, the “E” in the P/E equation, down.

The Future of Corporate Profits. The “E” in the PE Equation

I wrote this article last year, on the risk that high corporate margins present to investors.  Here is updated excerpt from that article:

Today’s stock market valuation is higher than it may appear. As margins revert to the historical average (and they always do), corporate earnings growth will either decelerate — disappointing Wall Street expectations of 8% earnings growth (according to First Call) for the S&P 500 over next five years — or decline, driving earnings, the “E” in the P/E equation, down. The broad market index fund investor may be in a pickle when a cheap market suddenly becomes more expensive. If today’s corporate profitability reverts to the mean profit margins observed over the last 25 years (8.8%), corporate profits would decline almost 31%.

Please read the following important disclosure here.

Enjoyed this read?

Share it with someone who’d love it too!

New to investing?

Explore these valuable guides to get started.

Value Investing
Student
Curriculum

The 6
Commandments
of Value
Investing

Letter to
a Young
Investor

Related Articles

Current thoughts on Tesla (TSLA)

Current thoughts on Tesla

Tesla market value of $780 billion mostly reflects Elon's future dreams, not car sales. The reality? Only $100-180 billion tied to the actual vehicle business.
Europe Can’t Hide Behind America Anymore

Europe Can’t Hide Behind America Anymore

Americans have always outspent Europe on defense, but to be fair, we have a currency advantage. Our military might elevated our currency to reserve status.
Europe’s New Status: The Children’s Table (IMA Client Dinner 2025 Video)

IMA’s March 2025 Client Dinner Video

Once a year, my company, IMA, hosts a dinner for our clients. Most of them live outside of Denver—and many outside the U.S.—so this event gives us a rare and meaningful chance to meet face-to-face, often for the first time, and really get to know each other.
The Reputational Bankruptcy of the American Dollar

The Reputational Bankruptcy of the American Dollar

The US dollar will likely continue to get weaker, which is inflationary for the US. Let me start with some easily identifiable reasons.

Leave a Comment