The Long View - From Earnings to GDP and Back

The Long View


Why long-term investors should be concerned with current profit margins


“Focusing on the big picture will not only help put the daily news flow into perspective, but lead us to important insights. In this report we will show why corporate tax rates don’t matter, why earnings growth trends are declining and why every long-term investor should be concerned about current profit margins.”


In the first edition of “The Long View” we outlined our research project for this year. We first focused on the valuations of different equity markets and on investment themes, and then promised to move on to long-term earnings trends, and finally income trends, before putting all the components together with our long-term capital market assumptions.

The discussions about market valuations usually grab the headlines, but for long-term investors earnings growth is arguably a much more important source of return. While changes in valuation multiples are the most volatile component of long-term returns and responsible for most of the variation over time, earnings growth and dividend income are the stable long-term drivers that define the level around which returns fluctuate.

For example, since 1880 until the end of March 2018, the total return of the S&P 500 Index in the US was composed of 4.1% dividend income per year, 4.9% earnings growth and 0.4% from multiple expansion. The UK stock market shows a similar picture. Since 1927, the total return has been composed of 4.7% dividend income, 4.8% earnings growth and 0.4% from multiple expansion. In short, about half of the total return of stock markets is due to the growth in corporate earnings.

While much time is spent by analysts and the media in forecasting earnings growth over the coming one to three years, we will be concerned in this report with earnings growth trends over the coming five to ten years – the investment horizon relevant for institutional investors.

To read the full report click here. 


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