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Six Reasons Why Corporate Profits Will Fall 50%
by Charles Hugh Smith Of Two Minds
Should stock valuations track this same decline in profits, it’s entirely reasonable to expect the stock market to lose 2/3 of its valuation premium.
All Six of the reasons corporate profits will decline by half are common sense:
1. Reversion to the mean: profits that are double the historical average as a percentage of Gross Domestic Product (GDP) are highly likely not to be a sustainable New Normal. The far more likely track is a reversion to the historical average, which is about 50% below corporate profits’ current 12% of GDP.Permanently elevated plateaus of stock valuations and corporate profits are both compelling chimera. (see chart below)
2. The Boost phase of Globalization has ended. The era of hyper-globalization is clearly visible on the charts of corporate profits and corporate profits as a percentage of GDP: right after China was accepted into the WTO in 2001, US corporate profits skyrocketed in both nominal dollars and as a percentage of the US economy (GDP).