So, company profits are rising much faster than the general economy, which is just growing about 2% annually (GDP growth). How do they do that?
Company earnings are rising faster
than the national incomes (GDPs) because corporations are getting more efficient & more
productive over time - thanks to
learning processes and the technological progress. Companies are learning
organisms because they are managed by humans who are continuously improving themselves
and their companies. During the
recession 2008 companies had restructured and
reduced costs significantly in order to survive. Now they are more fit
& more efficient than before.
Company earnings are also boosted by automation. Since the early 18th century (the first industrial revolution) the technological process has been enabling companies to produce more goods & services with
the same amount of employees. More and better machines are doing the
work of people which translates into lower costs, higher profit
margins and climbing earnings.
It seems that this process is accelerating again and we are at the begin of new industrial revolution. We are experiencing a rapid advance of information
technology, meaning combinations of computers, smartphones, Internet and
other digital systems. Software - which is increasingly Internet
connected and uses more and more the cloud (access to huge external data
centers) - organizes the whole business: Creating new products,
inducing machines to run more efficient, finding cheap suppliers, manage
customer relations and so on. Car producers and many
other manufacturers are increasingly using robots and similar machines
to reduce their costs. Companies are also beginning to use 3D-printers to
become more cost efficient and flexible.
Company profits are also boosted by the rise of the
emerging markets. China, India & Co. create additional markets. Therefore
companies can produce more which translates into shrinking average
production costs (economies of scale). Emerging markets also deliver
cheap supplies (most computers, tablets & smartphones are
manufactured there) which reduces the production costs further.
I believe that the learning
process will continue and will translate into a long term trend of fast rising
company profits, the engine of the stock market rally. Investors might forget about politics and focus on what really counts.