Transcription
This one chart explains why the US economy is in complete dysfunction. It shows us that the system has been flipped inside out. And not only has it been that way for over a decade, but it's reached an extreme level that has pushed us past the point of no return.
This line shows us how the profits of US corporations have grown since the 1980s. And this one shows us how personal income has grown. And while in the 80s and 90s personal income was growing faster than corporate profits, in the last 15 years we've seen that get flipped around. And it has sown the seeds for a major transfer of wealth in the coming years.
The real annual growth rate of corporate profits between 1947 and 2002 was 2.7%. But in the last two decades, this growth trajectory has been exceeded. Corporate profits have adopted a new growth rate since 2002 of roughly 5.1% per year adjusted for inflation.
In the meantime, personal income has done just the opposite. The annual growth rate of 3.4% to 4% prior to 2002 turned into a measly 2% growth rate between 2002 and the present day. And this is extremely important because historical trends like this provide people, consumers, businesses, investors with a framework for understanding what to expect from the future. And so real decisions stem from these historical trends and influence how resources are allocated or how the economic pie is divided up.
And we can see this alive by looking at what personal income looks like as a percentage of GDP. You can see it swings up and down depending on whether people's salaries are growing quickly or not. If we overlay the University of Michigan's consumer sentiment survey, we see that consumer sentiment tends to be correlated with personal income share of GDP.
Now look at what happens when we overlay corporate profits as a percentage of GDP. Now you may notice that these two lines actually move opposite to one another. When personal income is rising as a percentage of GDP, corporate profits are declining. And when personal income is declining, corporate profits are rising. We also notice that personal income's share of GDP has been declining since the 1980s while the corporate profits share of GDP has grown substantially. The gap between the two is about as large as it was in 2009, right after the great financial crisis.
What we are effectively looking at here is the economic pie. Most economic data like GDP growth looks at whether the whole economic pie is growing or contracting, which is of course very important. You want the economic pie to be growing over time because that means more for everybody. But here we're looking at how the pie is divided up. And what we see here is that corporate profits have taken up a larger share of the pie to the detriment of the share of personal income.
So, if you're wondering why real GDP growth can be beating expectations quarter after quarter with low inflation and a strong stock market and at the same time having a cost of living crisis, a housing affordability crisis, a record low consumer sentiment, and increasing social unrest, well, there's your answer.
This is why we also think this is one of the best moments in history to get involved and take advantage of financial markets. Because while the real economy is down the gutter, there has rarely been this much opportunity in financial markets. In the quarterly report that we just released, we dive into the specific sectors, assets, and stocks that we think can outperform in the first quarter of this year. We've made it temporarily free, so you can download it in the description below. We've also included a special gift that we're giving to anybody who watches the report. We go through the opportunities that we're already taking advantage of along with the ones that are on our radar that can thrive despite the divergence that we have between the real economy and the financial system.
Now, theoretically, there's no reason for why this divergence should reverse. It can keep on going like this with the economy steadily growing while the consumer's share of the pie gets smaller. But we think there is a good chance that all of this does reverse. And the reason for that can be found on this chart right here. It shows us corporate profits as a percentage of GDP pre-tax versus after-tax.
So, as we mentioned earlier, the after-tax profits share of GDP is currently sitting at the highest level in history, providing a historical amount of fuel for asset prices to move higher as all of this money essentially flows right back into the financial system. But when we look at corporate profits before taxes, they're actually not at the highest level ever. They're roughly at the same level they were at in the 1940s and 50s. What this essentially means is that back then corporations were making just as much money as they are right now, but a higher tax rate on corporations brought their share of the economy down substantially.
Today, the gap between pre-tax and after-tax profits is historically small. So, we have a golden combination of high pre-tax profits and low taxes, something that we haven't seen in roughly 100 years. If corporate tax rates were roughly in line with where they were in the 1950s, that would bring after-tax corporate profits down to roughly 6% to 7%. In other words, it would shrink corporate profits by a half instantaneously.
This would almost certainly cause significant short-term economic pain, making the economic pie shrink. Declining corporate profits directly translates into layoffs. So, even personal income would be impacted. But our estimate is that in this scenario, asset prices would take a much larger hit, which would actually make personal income's share of GDP rise while the economic pie shrinks, and that is the potential transfer of wealth that could take place. The US stock market is highly tied to the growth in corporate profits. A 50% contraction in after-tax corporate profits would likely translate directly into at the very least a 50% contraction in the S&P 500 index, possibly a lot more, as financial assets would be a lot less interesting to hold.
Now, we need to address the elephant in the room here, and that is the timing of all of this. Because as investors, there's a huge difference between this taking place in 2026 versus all of this taking place in 2030. Because the truth is, in the here and now, we remain in one of the most profitable environments to be a holder of stocks in history.
Now, we go into the details of what our strategy is for the stock market in the quarterly report that you can download for free in the description down below. But our conclusion is that the current administration is tax-friendly. And we have very little clarity on what the 2028 elections will bring. So to us, it's highly unlikely that this scenario takes place before the market has a clear vision of what to expect from the next administration. Another tax-friendly president would mean this environment can continue, but the opposite could bring about the scenario we discussed earlier.
This video is absolutely not to be mistaken as a political opinion, but rather as an analytical overview of what we believe is the most important theme taking place for the US economy and stock markets today. Again, if you want a more granular look at our expectation for the market in the first quarter of 2026, you can download our report in the description below. Thank you for watching.