The coming long-run slowdown in corporate profit growth and stock returns [pdf] (2023)

Original Article ↗ Hacker News Discussion ↗

A Federal Reserve research paper argues that most of the extraordinary U.S. stock market gains since the late 1980s stem from falling interest rates and corporate tax cuts, which boosted profits and valuations in ways unlikely to be repeated. Commenters weigh this against alternative explanations such as technological innovation, globalization, and financialization, debating whether these forces can sustain high returns once the tailwind from lower rates and taxes fades. The exchange touches on implications for index investing, pensions and 401(k)s, inequality, and whether demographic and structural shifts could mean a future of slower—but not necessarily negative—equity returns.

Paper’s main claim and reactions

  • Thread centers on the idea that falling interest rates and corporate tax rates explain much of 1989–2019’s exceptional stock returns, and that this tailwind is unlikely to continue.
  • Some commenters find the argument compelling and “mechanical”; others see it as overly narrow and dismissive of technology, globalization, and structural changes.

Interest rates, taxes, and stock performance

  • Several argue that multi‑decade stock outperformance is strongly correlated with a four‑decade decline in rates; rising rates in 1968–1982 coincided with poor real returns.
  • Others stress that high/low levels of rates matter less than their direction of change and that rates cannot keep falling from near‑zero, so the past regime is over.
  • There’s pushback that rate declines are not “luck” but partly a response to deflationary innovation.

Technology, innovation, and productivity

  • One side: semiconductors, software, AI, etc. obviously create massive value; it’s implausible to downplay them relative to Fed policy.
  • Counterpoint: at the macro level, creative destruction shifts profits across firms more than it raises aggregate profit share; tech often becomes table stakes, not a lasting profit driver.
  • Debate over the “productivity paradox” and whether current measures understate quality improvements and non‑monetized value.

Index funds, S&P 500, and market structure

  • Discussion of S&P 500’s changing composition and inherent upward bias; others note the entire market also churns, so it’s still a decent proxy.
  • Disagreement on whether “just buy the index” will keep working: some invoke efficient markets; others think the era of easy index gains driven by falling rates is ending.

Globalization, automation, and aggregate profits

  • Some argue the paper underweights gains from global supply chains and future automation/AI.
  • Others respond that under standard models, widely diffused technology and globalization don’t sustainably raise aggregate profit margins once competition responds.

Financialization, buybacks, and inequality

  • Concerns that “financialization” and buybacks boost short‑term returns and executive pay while hollowing out workforces and US manufacturing.
  • Counterpoints note middle‑class 401k holders also benefit, though many lack market exposure and face job insecurity.

Demographics, retirement, and regime risk

  • Aging populations and retirement drawdowns are seen as a major headwind for future returns.
  • Debate over whether pensions vs. 401k‑style systems better handle demographic shifts; no consensus.

Regulation and public vs. private markets

  • Multiple comments describe going public as increasingly burdensome (accounting, disclosure, activism), helping drive firms to stay private and outsource capital‑intensive activities like manufacturing.