After Iraq: the Real World of Earnings

I wrote about a study last year that suggested corporate earnings in the US could not grow by more than the growth of GDP.

"Our median estimate of the growth rate of operating performance corresponds closely to the growth rate of gross domestic product over the sample period ....the growth in real income before extraordinary items is roughly 3.5% per year" (after inflation and dividends. Before them it is about 10%.) "This is consistent with the historical growth rate in real gross domestic product, which has averaged about 3.4 percent per year over 1950-98. It is difficult to see how over the long term profitability of the business sector can grow much faster than overall gross domestic product. " (From a National Bureau of Economic Research Report by three economics professors: Chan, Karceski and Lakonishok).

While there are firms that are, of course, exceptions, this should not come as a real surprise. GDP is the average of the growth in the economy. Thus companies on average cannot grow earnings faster than the total economy.

But today, we are going to look at a study from two of America's premier investment research minds which shows that it is not even true that earnings grow as much as GDP.…