What do falling profits mean for markets?

Julian Howard, investment director in GAM's Multi-Asset Class Solutions team, analyses the implications of elevated equity valuations and falling earnings for investors

Corporate profits of listed companies around the world are declining after nearly two decades of growth relative to total output. This is of particular concern for equity investors as valuations are elevated following several years of price gains without corresponding increases in earnings. Globalisation, low corporate taxation, low financing costs and a 'winner takes all' sector concentration in areas such as IT have created a halcyon era of profitability. However, this era is under severe threat due to fundamental challenges in the form of increasing competition and labour costs. We...