Money For the Rest of Us

Dissecting Stock Returns: Financial Engineering or Genuine Growth?

Dec 6, 2023

Exploring the link between corporate profit growth and economic growth, the decline in publicly traded stocks, the impact of leveraged buyouts, and the relationship between GDP growth and stock returns. Also discusses the decline in manufacturing workers, financial engineering, and the volatility of stock market returns.

27:43

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Quick takeaways

Financialization has influenced corporate profits and stock market performance through financial engineering.

Recent stock market appreciation has primarily been driven by an increase in valuation, indicating investors' willingness to pay more for earnings.

Deep dives

Impact of Financialization on Stock Returns

The podcast episode discusses the concept of financialized growth, which refers to the role of financial motives and actors in driving economic growth and stock returns. The speaker reviews a paper by economist Michael Smoyansky, who predicts that stock returns will be lower due to the influence of financialization, specifically lower tax rates and interest rates. The analysis reveals that corporate profits tend to grow faster than the economy, which is unusual, indicating the impact of financialization on stock market performance.

Introduction

2min

Corporate Profits vs. US Economic Growth and Stock Market Drivers

4min

The Relationship Between GDP Growth, Earnings Growth, and Stock Returns

11min

The Decline of Manufacturing Workers and the Growth of the Stock Market

3min

The Decrease in Publicly Traded Companies and the Role of Leveraged Buyouts

8min

Volatility and Lower Returns in the Stock Market

3min

Do the impressive returns in public and private markets stem from strategic financial engineering or reflect actual economic growth?

How corporate profit growth is linked to economic growth, even though corporate profits are more volatile
How interest rates, tax rates, and stock buybacks influence corporate profits and stock returns
Why there are fewer publicly traded stocks
How the increase in leveraged buyouts has impacted the economy
How private equity funds use financial engineering to boost returns

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Show Notes

US CEOs start to contemplate Trump, round 2 by Rana Foroohar—The Financial Times

End of an Era: The Coming Long-Run Slowdown in Corporate Profit Growth and Stock Returns by Michael Smolyansky—The Federal Reserve

10-Year Stock Market Returns—Crestmont Research