What’s Ahead for the Economy and Corporate Earnings in Long Term
Alison T. from Topeka, KS asks: Hello Mitch, I’m curious if you’d ever make a long-term prediction about where the U.S. economy is headed? I’m talking 10, 20, 30 years out. These are some pretty crazy times, and I wonder where you see it all going.
Thanks for your question, Alison. I generally do not make forecasts more than one or two years out – there is too much that can change in terms of interest rates, inflation, and corporate earnings to give a good answer about the U.S. economy’s trajectory over that many years. If you do encounter a forecast for that many years in the future, don’t read into it too much – the forecaster is just guessing.
I do think, however, we can use history to make some high-level, non-numerical projections about the future. And I think I can give you an answer to your question using two charts.
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The first one is simply United States GDP – which is a measure of the economy’s total output – looked at in the post-World War II era (the modern economy). I adjusted the chart to be a natural log so you can better see the overall trend of economic growth since the late 1940s. As you can see, the U.S. economy has steadily gotten bigger and bigger over the years, with setbacks along the way but not enough to break the trend.
U.S. Gross Domestic Product, 1947 – Present
The second chart to show you is U.S. corporate profits after tax. Long-time readers of my columns know my conviction of tying corporate earnings to stock market returns. Changing expectations around interest rates and inflation are important, too, but corporate earnings are the engine for the economy and the markets, in my view. As you can see in the chart below, corporate profits have also tracked steadily higher since the late 1940s. There were plenty of bumps along the way, but the engine of profit has marched higher from decade to decade.
U.S. Corporate Profits After Tax, 1947 – Present
In your question, you referred to these as ‘crazy times,’ which is a fair assessment. But remember that history is full of crises, high tax rates, inflation, disinflation, rising interest rates, bursting bubbles, wars, tight and loose monetary policy, and pretty much everything else you can think of. Through it all, the U.S. economy continued to grow and corporations continued to generate earnings.
In my view, history offers a compelling enough reason not to bet against the U.S. economy long-term. But we are also firm believers in the U.S.’s ability to lead in innovation – in analyzing companies as we do every day here at Zacks Investment Management, we constantly see new ideas, new businesses, new products, and often marvel at the economy’s ability to grow, adapt, invent, and generate new value and wealth. So, while I can’t say for sure where the U.S. economy will be in 10, 20, or even 30 years, I do know that I will not be betting against more growth and progress.
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2 Fred Economic Data. October 28, 2021. https://fred.stlouisfed.org/series/GDP#0
3 Fred Economic Data. September 30, 2021. https://fred.stlouisfed.org/series/CP#0
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