Bill Gross rocked the world of stock market investors when he declared “the cult of equity is dying” in his letter to PIMCO clients. Among other things, Gross argued that it was not economical for return on a stock market to grow faster than the country’s GDP.Since Gross published that letter, the stock market experts came out in full force to point out the flaws in Gross’s argument.
David Bianco, Deutsche Bank’s Chief U.S. Equity Strategist, is just the latest to publish a defence. Rather than just talking about stock market returns, he looks at profits. From his note to clients today:
Higher S&P 500 profits relative to GDP can be attributed to sustainable causes
Some investors take concern with elevated S&P 500 profits relative to GDP vs. history. We believe this is secularly sustainable owing to: 1) lower interest rates and debt usage, 2) a higher proportion of S&P 500 profits from abroad, and 3) Technology sector gains. We also remind investors that the profitability of Energy and most Industrial and Materials companies was depressed in the 1990s owing to weak commodity prices and limited global infrastructure investment. Financial sector profits were high in the mid 2000s, but not now.
David Bianco told Business Insider that “S&P 500 profits by region” was one of the most important charts in the world.