Lower tax and interest rates have boosted the stock market for the past several decades, a formula that is ending and will keep returns low in the future, a Federal Reserve research report concludes. Michael Smolyansky, principal economist at the Fed, argues in a white paper released recently that reduced tax rates and borrowing costs accounted for nearly half the real growth in corporate profits from 1989 to 2019.
To sustain the relationship, both interest and taxes would have to continue to fall, the paper states. In fact, Smolyansky expects profits to grow at just a 2% pace, with GDP around the same . Perhaps more importantly, that 2% rate also is likely to apply to annual stock gains. "If real earnings growth is not likely to exceed 2 percent per year over the long run, then the outlook for stocks is bleak," Smolyansky wrote.
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