Bespoke macro strategist George Pearkes published an in-depth report titled “Corporate Profits: Whither, Why and Wherefore?” The report, sent to Institutional subscribers only, takes a deep dive on a very important topic that is not widely appreciated by investors: the interplay of corporate profits, labor costs and fixed investment. Extremely elevated corporate profits (as a % of GDP) have been a key driver of stock market returns since the financial crisis. The strength in corporate profits has been from a confluence of muted labor cost increases, higher productivity, relatively low fixed investment and a low interest rate environment. As each of these factors has begun reversing, George argues that levels of corporate profits are likely unsustainable. As for what that means for equity returns, the key question is whether or not higher unit labor costs will be offset by gains in productivity from higher fixed investment. For those interested in the macro view, this report is a must read. If you struggled in your college macroeconomics course, this may bring back bad memories.

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