Major Inflection Point Coming
One of the reasons share prices have risen so dramatically relative to revenues is that corporations are earning a lot more on each dollar’s worth of sales these days. How are they doing that? By squeezing their workers.
Labour’s share of corporate income has plunged recently. Workers have been producing more per hour, but their pay hasn’t kept up as their bosses held on to more of the resulting profit.
Much of this is due to offshoring. Other contributors are automation, and the fact that the minimum wage in many states has kept up with neither the true inflation rate nor the increase in free-trade driven corporate earnings.
For stock market investors, the scary thing about this imbalance between capital and labour is that it’s only temporary. As the details and magnitude of the scam have been exposed, the political tide has shifted. At the national level, US workers have installed an anti-free trade administration that will tilt the field towards domestic workers. At state and local levels, calls for a higher minimum wage are being heard and acted upon.
So it’s safe to assume there will be serious inflection points going forward, as a rising share of profits flow to the nether regions of the org chart and investors respond by lowering the value they place on a given dollar of corporate revenues.
A return to 1990s valuation levels would cut the average US stock in half.