4 ms·

The first point I make is that profit growth has been flat since ~2014 but the stock market has gone up quite a bit. My question is: Why had the stock market c

The first point I make is that profit growth has been flat since ~2014 but the stock market has gone up quite a bit. My question is: Why had the stock market continued to go up despite flat profits?

Enginerrrd 7y ago
My guess is that the answer to that is cheap debt from the fed keeping interest rates so low for so long. The stocks had value beyond what you'd expect from P/E ratiosand assets alone because there was added future value in the form of anticipated stock buy backs.
- JackFr 7y ago
  If debt is that cheap it would be irresponsible to finance the firm with equity.
  - adwn 7y ago
    > If debt is that cheap it would be irresponsible to finance the firm with equity. Why?
  - Enginerrrd 7y ago
    That really depends on your timelines and risk tolerance assessment including externalities. To use poker as an analogy: if you aren't sufficiently bankrolled, the correct play (most positive EV) can involve an unacceptably high risk of ruin. ....and BTW are you also factoring in the probability of fraud or a government seizure in your calculations?
skrebbel 7y ago
When you say profit growth was flat, that means that profit grew linearly, correct? If true then that's pretty impressive and possibly much better than what the markets ~10 years ago expected?
- timlangeman 7y ago
  Sorry, to clarify, their profit hasn't been growing. Since 2014, Profit (before taxes) has been roughly $2.2 trillion every year. https://fred.stlouisfed.org/graph/?g=qx3r https://fred.stlouisfed.org/graph/?g=qx3r
  - skrebbel 7y ago
    Ah right. Good point then!
raincom 7y ago
'flat' only if you see through the shenanigans; otherwise, EPS (earnings per share) have increased, by reducing the outstanding shares. When interest rates are low, firms can finance to buy back. Not only that, investors shift their investments to stocks, instead of bonds. Two forces are at work to pump stocks, both forces are products of low interest rates.

The first point I make is that profit growth has been flat since ~2014 but the stock market has gone up quite a bit. My question is: Why had the stock market continued to go up despite flat profits?

Enginerrrd 7y ago

My guess is that the answer to that is cheap debt from the fed keeping interest rates so low for so long. The stocks had value beyond what you'd expect from P/E ratiosand assets alone because there was added future value in the form of anticipated stock buy backs.

JackFr 7y ago
If debt is that cheap it would be irresponsible to finance the firm with equity.
- adwn 7y ago
  > If debt is that cheap it would be irresponsible to finance the firm with equity. Why?
- Enginerrrd 7y ago
  That really depends on your timelines and risk tolerance assessment including externalities. To use poker as an analogy: if you aren't sufficiently bankrolled, the correct play (most positive EV) can involve an unacceptably high risk of ruin. ....and BTW are you also factoring in the probability of fraud or a government seizure in your calculations?

skrebbel 7y ago

When you say profit growth was flat, that means that profit grew linearly, correct? If true then that's pretty impressive and possibly much better than what the markets ~10 years ago expected?

timlangeman 7y ago
Sorry, to clarify, their profit hasn't been growing. Since 2014, Profit (before taxes) has been roughly $2.2 trillion every year. https://fred.stlouisfed.org/graph/?g=qx3r https://fred.stlouisfed.org/graph/?g=qx3r
- skrebbel 7y ago
  Ah right. Good point then!

raincom 7y ago

'flat' only if you see through the shenanigans; otherwise, EPS (earnings per share) have increased, by reducing the outstanding shares. When interest rates are low, firms can finance to buy back. Not only that, investors shift their investments to stocks, instead of bonds. Two forces are at work to pump stocks, both forces are products of low interest rates.