Since 1947, US net corporate earnings as a percent of GNP have averaged 6.6%. However, something changed in the early 2000’s when the Federal Reserve embarked on their monetary experiment of unlimited money printing. A combination of ultra-loose monetary policy by the Fed and financial engineering by Corporate America has led to a sustained period of strong earnings growth for US companies and a 65% increase in net margins from 6.6% to 9%. Mean reversion during the financial crisis of 2008 looks like a blip on the chart. An inevitable return to the long-term trend over time of ‘just 6.6%’ means downside risks to the stock market are significant.
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