Expect Earnings Growth To Fade a Tad in Years Ahead 

U.S. corporate earnings growth has been exceptional since the early 1980s, trending at just under 7% annually, which means $1 of earnings 40 years ago is now $15. This exceptional growth has been driven by four tailwinds that are less likely to be repeated in the future.  

First, interest rates, which were approaching 20% in 1980, fell to near zero in 2020. This persistent decline reduced capital costs and interest expenses. Interest rates are notoriously difficult to forecast, but it is impossible for rates to fall another 20 percentage points from here.  

Second, corporate tax rates have plummeted. In 1980, the corporate tax rate was 46%; today it’s 21%. Corporate tax rates will be on the negotiating table as the U.S. government moves to address a mounting debt/deficit issue that could threaten the country’s economic wellbeing.  

Third, the demographic mix in the United States was conducive to excess labor supply, putting downward pressure on labor costs like wages. While workers periodically managed to press for higher wages, the aggregate trend over the past 40 years has been for lower wages. For most of that time there have been more workers available than jobs. However, the labor market now appears undersupplied, with more than one job available per worker. Such an environment requires a technological solution—such as artificial-intelligence innovations—to empower workers to accelerate their ability for productive output. Absent these productivity gains, wages may go up with more of an inflationary impact. 

Fourth, globalization drove down costs and allowed for growth in new markets. Hypo-globalization—in which global trade stagnates without meaningful change—is more likely than the hyper-globalization that occurred for much of the past few decades. Such a stagnation is not as costly as deglobalization, but neither does it provide the beneficial cost-reducing tailwind of globalization. 

Bottom line – The long-term outlook for corporate earnings is one of less exuberance as the tailwinds of the past fade. However, an acceleration in productivity growth from AI or other sources—permeating across sectors and industries—could improve the picture. Without these productivity gains, trend earnings growth may be closer to 5% than 7%.