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Long-run Slowdown in U.S. Equity Market Ahead?

August 1, 2023 • Posted in Economic Indicators, Equity Premium, Fundamental Valuation

During 1989 through 2019, the S&P 500 Index generated 5.5% real annual return, compared to just 2.5% annual real growth in U.S. gross domestic product (GDP). How can this disconnect happen? Can it continue? In the June 2023 version of his paper entitled “End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns”, Michael Smolyansky examines interactions between U.S. stock market performance and declines in interest rates and corporate tax rates over the last three decades. He focuses on S&P 500 non-financial stocks adjusted for index additions/deletions and for changes in firm shares outstanding, allowing computation of per share metrics. He decomposes stock returns into: (1) change in price-earnings ratio (P/E);  (2) change in earnings before interest and taxes (EBIT); (3) change in interest expenses; and, (4) change in effective corporate tax rate. Using the specified annual data during 1962 through 2019, he finds that: (more…)

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