Ratio of Corporate Profits-to-GDP and Returns (1947 to Present)[ Enlarge Image ]
Source: Hussman Weekly Comment “Taking Distortion at Face Value,” (April 8, 2013)
Warren Buffett, 1999
– Warren Buffett, Mr. Buffett on the Stock Market (November 1999)
[F]rom 1951 on, the percentage settled down pretty much to a 4% to 6.5% range.
In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%. One thing keeping the percentage down will be competition, which is alive and well.
Jeremy Grantham, 2006
– Jeremy Grantham, Barron’s (c. 2006), via Katsenelson, The Little Book of Sideways Markets.
Profit margins are probably the most mean-reverting series in finance, and if profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, there is something wrong with the system and it is not functioning properly.
John Hussman, 2013
– John Hussman, Two Myths and a Legend (March 11, 2013)
In general, elevated profit margins are associated with weak profit growth over the following 4-year period. The historical norm for corporate profits is about 6% of GDP. The present level is about 70% above that, and can be expected to be followed by a contraction in corporate profits over the coming 4-year period, at a roughly 12% annual rate. This will be a surprise. It should not be a surprise.
Also check out:
- Jeremy Grantham Undervalued Stocks
- Jeremy Grantham Top Growth Companies
- Jeremy Grantham High Yield stocks, and
- Stocks that Jeremy Grantham keeps buying
- John Hussman Undervalued Stocks
- John Hussman Top Growth Companies
- John Hussman High Yield stocks, and
- Stocks that John Hussman keeps buying