Even before the Covid-19 crisis set off what is shaping up to be the worst economic shock since the Great Depression, corporate profits were showing signs of peaking. To understand why and explore what business leaders can expect when the economy returns to a steady state, Bain & Company’s global think tank Bain Futures teamed with Oxford Economics to study whether the forces that have contributed to this golden age of profitability will persist into the future.
Based on that research, a new report, Peak Profits: The Golden Age of Profitability is ending, identifies several key factors involving both market dynamics and potential backlash from governments and societies that could dampen profit potential for public companies in the years ahead. These forces predate Covid-19, but like many historic crises before it, the pandemic has the potential to accelerate gradual currents of change that otherwise might have taken a decade or more to play out.
The study found that over the past several decades, six waves of change have powered the steady rise in corporate profitability:
- Labor’s waning bargaining power, due to a decline in unionization and simultaneous expansion of the labor supply.
- Financial liberalization, which drove up the profitability and economic share of financial services.
- Globalization, which allowed firms to access lower cost supply chains and new export markets.
- A commodity super-cycle, driven by surging industrialization in China and India.
- The rise of the Internet platforms (in the US especially), which powered extraordinary profitability for a small cohort of firms through network effects and curation economics.
- Automation, which fueled the displacement of labor with capital in an expanding range of sectors.
“These six waves have been particularly strong in the United States, pushing returns for US public companies to historic heights. Yet, while average profitability has been steadily rising, median profitability has actually fallen,” said Andrew Schwedel, partner at Bain & Company in New York and co-chair of Bain Futures. “Large firms have grown larger while mid-sized firms have increasingly relied on leverage to boost returns in recent years, driving their debt ratios to the highest levels in decades.”
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