A recent whitepaper by the Federal Reserve warns of "significantly lower profit growth and stock returns in the future." In his article, End of an Era: The coming long-run slowdown in corporate profit growth and stock returns, Michael Smolyansky explains how the interest rate and corporate tax rate trends for the last thirty years provided a strong tailwind for corporate profits. As a result, stocks performed better than would have otherwise been the case.

Understanding why corporate profits and, ultimately, stock prices outperformed in the past is important. However, more critical for investors is the future and assessing how interest rates and tax rates will affect earnings growth and stock prices.

To expand on the article's warning, we examine a few large well-known companies to see how lower interest and tax rates benefited their bottom lines. But first, we summarize the Fed article.

Key Takeaways

GDP growth fell markedly over the last 30 years while corporate profit growth rose slightly.

Lower interest and tax rates and increased leverage greatly benefited corporate net profits.

McDonald's, Pepsi, and Clorox support the Fed's findings.

Can profits maintain recent growth trajectories without the benefit of lower interest and tax rates?

End of an Era- Article Summary

The graph below shows that corporate earnings have grown faster over the last 30 years than in the 40 years before. The robust earnings growth occurred despite economic growth shrinking markedly.