If corporate profits are so high, why is the stock market tanking?
October 28, 2022 8:22 AM Subscribe
I mean that's it.
I know I may be over-simplifying things, but I DO know that corporate profits are soaring. Also, the stock market is NOT soaring. OK, so please help me understand why corporations that are raking in record profits don't have record stock prices and dividends.
Please do this in language that a non-economist can grasp.
Thank you!!
Yes, share price is all about what might happen tomorrow. Lots of things influence people's beliefs about what might happen tomorrow. These include predictions about inflation, taxes, consumer spending, government spending, as well as profits today (and I'm sure, plenty of things I haven't thought of).
Companies that are posting lower profits than expected are probably seeing their share prices fall further than the average. But, even where they are posting very high profits, if they are not as high as people thought they were going to be, then their share price might fall.
posted by plonkee at 9:00 AM on October 28, 2022 [1 favorite]
Companies that are posting lower profits than expected are probably seeing their share prices fall further than the average. But, even where they are posting very high profits, if they are not as high as people thought they were going to be, then their share price might fall.
posted by plonkee at 9:00 AM on October 28, 2022 [1 favorite]
Consider an undoubtedly oversimplified story: for many years now, when you were deciding where to invest your money, the return on most bonds, especially the safest ones, was very low. That means that many people seeking returns piled into the stock market, pushing stock prices up (a semi-self-perpetuating mechanism). Now the Fed has raised interest rates, meaning that bond rates will slowly rise (because they tend to use the Fed "no risk" interest rate as the baseline). That means that at least some of that money is going into bonds, and instruments who value in some way depends on bonds, instead.
posted by praemunire at 9:27 AM on October 28, 2022 [4 favorites]
posted by praemunire at 9:27 AM on October 28, 2022 [4 favorites]
In addition to what's said already, the market can get overvalued and then go through a correction. Even profits are still going up, the market can say that even with that, they were overpriced to begin with.
One of the things driving valuation was the ability to borrow money at historically low rates. Now that interest rates are significantly higher, for both consumers and businesses, future profits are less likely to be as good.
Profits have not been good at Google/Facebook/Amazon and they make up a huge part of the market, so those three alone having a bad quarter can drop the entire index, which in turn often causes other drops. Similarly, oil has been massively more profitable this year so if you just look at the aggregate, it looks like everyone is doing better than they might be. And oil stocks are still doing well. You can see a breakdown by industry here.
posted by Candleman at 9:29 AM on October 28, 2022
One of the things driving valuation was the ability to borrow money at historically low rates. Now that interest rates are significantly higher, for both consumers and businesses, future profits are less likely to be as good.
Profits have not been good at Google/Facebook/Amazon and they make up a huge part of the market, so those three alone having a bad quarter can drop the entire index, which in turn often causes other drops. Similarly, oil has been massively more profitable this year so if you just look at the aggregate, it looks like everyone is doing better than they might be. And oil stocks are still doing well. You can see a breakdown by industry here.
posted by Candleman at 9:29 AM on October 28, 2022
Profits have been good for some (not all) major tech players, haven’t they? It’s just that the bar is set at “better,” not good.
posted by stoneandstar at 11:16 AM on October 28, 2022
posted by stoneandstar at 11:16 AM on October 28, 2022
Imagine I'm an upper middle class homeowner with an adjustable (variable) rate mortgage. Since 2008 I've benefitted from lower mortgage payments because interest rates have been so low so that means I have money left over at the end of the month. If I put that in a savings account or something secure like a GIC then I'm getting next to no interest on it so I'm more likely to invest it. That could be in stocks or in real estate where I'll buy a rental property or two and the rent I get from the tenants will easily be able to cover my expenses. I could also do something like take out an additional loan using my home as collateral and then invest the money because the returns I'm chasing are easily going to cover the 2-3% interest on the loan.
Now that interest rates have gone up the mortgage payments on my own house aren't so low any more so I have less of a surplus at the end of the month. Plus now food and gas prices have gone up so my other spending is eating into the surplus too. If I had extended myself and bought one or more rental properties then maybe I'm in a situation where the rent doesn't cover my expenses anymore and so I've got to spend there as well.
In this scenario I'm not looking to buy any stocks right now and if I have some I might think about selling them either to help out with my liquidity or because I'm worried there might be a crash and I want to get out before that happens because even if the stocks are "tanking" right now they're still significantly higher than when I bought them and I'm still making a profit.
posted by any portmanteau in a storm at 1:36 PM on October 28, 2022 [1 favorite]
Now that interest rates have gone up the mortgage payments on my own house aren't so low any more so I have less of a surplus at the end of the month. Plus now food and gas prices have gone up so my other spending is eating into the surplus too. If I had extended myself and bought one or more rental properties then maybe I'm in a situation where the rent doesn't cover my expenses anymore and so I've got to spend there as well.
In this scenario I'm not looking to buy any stocks right now and if I have some I might think about selling them either to help out with my liquidity or because I'm worried there might be a crash and I want to get out before that happens because even if the stocks are "tanking" right now they're still significantly higher than when I bought them and I'm still making a profit.
posted by any portmanteau in a storm at 1:36 PM on October 28, 2022 [1 favorite]
Can we also add that a lot of companies have a lot of debt - so increased interest rates are going to affect returns.
As interest is tax deductible and dividends are not - there is a huge incentive to borrow money to buy "something/anything", increasing turnover and EBIT (earnings before interest and taxation), which shows company "growth". Profitability - questionable. And it gets worse once interest rates move.
posted by Barbara Spitzer at 6:44 PM on October 28, 2022
As interest is tax deductible and dividends are not - there is a huge incentive to borrow money to buy "something/anything", increasing turnover and EBIT (earnings before interest and taxation), which shows company "growth". Profitability - questionable. And it gets worse once interest rates move.
posted by Barbara Spitzer at 6:44 PM on October 28, 2022
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posted by AndrewInDC at 8:34 AM on October 28, 2022 [6 favorites]