Our forecast that the S&P 500 will do no better than trend sideways for the next year is based on our belief that, with the unemployment rate at a 17-year low, most of the gains in nominal GDP next year will accumulate to workers in the form of higher wages rather than to businesses as higher corporate profits.
The structural rise in the corporate profit share since the early 1990s, which mirrors the structural decline in labour’s share of income, was driven by globalisation and the integration of workers in China and exSoviet countries into the global labour force. But that upward trend appears to be fading, with the profit share once again mostly determined by cyclical pressures. The upshot is that we wouldn’t be surprised to see an outright fall in both the profit share and the level of profits next year, as the dollar rebounds and tight labour market conditions force firms to boost wages.
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