Tags: stock | market | bubble | different

New Yorker: No Stock Bubble — This Time Is Different

By Michael Kling   |   Thursday, 23 May 2013 08:17 AM

Plenty of pundits see a stock market bubble that will soon pop just as stock prices have crashed in the past.

The bears argue that stocks are overvalued by historical standards and the economy is improving only slowly. Although high corporate profits make price-earnings ratios appear normal, those profit levels cannot continue forever. And when they do return to normal, stock prices will plummet.

Time and again, as stock prices continue rising to unsustainable heights, stock enthusiasts have preached, "This time is different."

Editor's Note:
'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

But this time really is different, argues The New Yorker. In this case, the present is not the same as the past.

After-tax corporate profits are more than 10 percent of gross domestic product (GDP); the historical average is about 6 percent. After-tax profits are higher because corporations pay much less in taxes than they did previously, The New Yorker points out. They paid almost half of reported profits in taxes in 1951, and over 30 percent in 1965, compared with about 20 percent now.

Globalization is another reason why this time is different.

Many nominal American companies are actually multinationals garnering substantial earnings abroad. In the past, overseas earnings represented just a fraction of earnings, but now they account for almost a third.

"So comparing corporate profits only to American GDP yields a false picture of how companies are doing," The New Yorker states.

Plus, weaker unions have allowed corporations to cut payrolls, helping them keep large profits.

Overall, the economy is friendlier to business and investors, the publication asserts. "The fundamental trends that have driven the profit boom are unlikely to be reversed."

"For investors, that’s obviously good news: there’s nothing wrong with profits, and the rebound of the stock market has helped restore many Americans’ battered finances."

Investor exuberance in the future could easily create a bubble that could be popped by a panic. But for now, since there is no profit bubble, there is no stock bubble.

Kiplinger's Personal Finance columnist Jeremy Siegel, a professor at the University of Pennsylvania’s Wharton School, agrees that stocks have room to run and a bubble is not imminent.

Bears say corporate profits are unsustainably high when compared to share of GDP or revenues.

However, proprietors' income — profits from privately held firms, partnerships and other noncorporate businesses — has fallen, while corporate income has taken a larger share of the economy. Those two incomes combined roughly equal the historical average, he writes.

Plus, larger foreign sales have contributed to increasing profits because foreign corporate taxes are lower than U.S. taxes, Siegel adds.

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

© 2015 Newsmax Finance. All rights reserved.

1Like our page

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

© Newsmax Media, Inc.
All Rights Reserved