From economist.com:
Big listed firms’ earnings have hit a wall of deflation and stagnation
THE idea that profits grow is embedded in the corporate world. Bosses’ pay rises if they boost earnings per share. Managers who admit their firms may shrink are viewed as cowards and taken outside and shot. Lenders assume that firms’ cashflows will grow, allowing them to repay debts. In a daft ritual, Wall Street analysts start most years by collectively forecasting that earnings per share will rise at double-digit rates. Actual growth has been lower but has still had a dazzling run, averaging 8% over the past 30 years for the S&P 500 index of big American firms. Even after the 2007-08 crisis floored the global economy, profits recovered smartly.
Perhaps that is why reality has yet to sink in: the business world is stagnating. For the second quarter in a row the sales and profits of members of the S&P 500 are expected to fall; for the three months to September they are forecast to be 3-5% lower than in the same period last year. Earnings recessions are rare, happening only about once in each decade.
The Panglossian response this time is to blame one-off factors, in this case low energy prices and a strong dollar. The latter crimps the value of foreign income once it is translated into greenbacks.
Alas, corporate sloth is a far deeper and more widespread problem than that. Consider that half of big listed American firms now have shrinking profits (see chart 1). Even excluding energy and the dollar, S&P 500 earnings growth is slow. Many bellwethers—Walmart, IBM, General Electric (GE)—face flat or declining top lines. While traditional industries, from hotels to television, grumble that technology firms are eating their lunch, even the tech industry’s earnings are flat, with the likes of Alphabet (formerly known as Google) approaching middle age. Sluggishness is everywhere. Worldwide earnings per share have stopped growing, measured in dollars. In local-currency terms sales growth has stalled in Asia, slowed in Europe and is expected to collapse in Brazil. On October 16th Nestlé, Europe’s second-most-valuable firm, said it would miss its long-standing sales target this year.
To continue reading: The age of the torporation
