Economics: Why Do Company Earnings Grow Faster Than The Pundits Expect?

(Drivebycuriosity) - It is earnings season again. More than 60% of the S&P 500 members have reported their results from Q3 2018 so far. Their earnings rose on average 22.7% from the same period last year and 78% beat the earnings expectations of the analysts (zacks).

A part of the earnings growth is the result of the recent tax cuts of the Trump administration, about 7 percentage points estimates LPL research, which reduces the (basic) earnings growth rate to about 16%. I think that company earnings will continue to grow with double-digit rates because fast rising company earnings are a long term trend.

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 (robots) 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.

Enjoy!