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.

Related Articles

The Best and Worst Investment Decisions Ive Made

The Best and Worst Investment Decisions I’ve Made

I’m going to share stories about my best and worst investment decisions. But don’t worry, this isn’t just a brag-and-cringe session about making or losing money.
Trump’s call for a bitcoin strategic reserve is a very bad idea

Trump’s call for a bitcoin strategic reserve is a very bad idea

At the end of July, Donald Trump went full Bitcoin. He wants the US to become a “Bitcoin superpower”; he promised to build a Bitcoin strategic reserve.
Unpacking Buffetts Investment Philosophy A Personal Perspective

Unpacking Buffett’s Investment Philosophy: A Personal Perspective

How does our investment approach stack up against Warren Buffett’s? Answering this question gives me a chance to dissect Buffett’s famous investment principles and compare them to our own strategy.
The Eclectic Value Investor

The Eclectic Value Investor

How do I describe myself as an investor? This question provides an opportunity to delve into what I mean by being an “eclectic value investor with a slight touch of dogmatism.”

Leave a Comment