Can both the economists and strategists be right?

[CHIMO]

Most economic forecasters see U.S. nominal GDP growth at 4 per cent this year. But strategists see, on average, 36-per-cent corporate earnings growth. What gives?

My team at Gluskin Sheff ran some simulations back to the 1950s and found that, historically, what is normal is that every percentage point of nominal GDP growth typically generates 2.5 percentage points of corporate earnings growth.

So, if the past is prescient, that expected 4-per-cent growth in nominal GDP is only enough to boost profits by 10 per cent – imagine that this is now considered a “bearish” profit forecast even though, on average, corporate earnings rise 7 per cent annually.

In today's world of juiced-up expectations (what a far cry from the malaise a year ago), 10-per-cent profit growth just doesn't cut it. But to see such low nominal economic growth and such strong profit growth is a one-in-more-than-50 event.

http://www.theglobeandmail.com/globe-investor/investment-ideas/features/experts-podium/can-both-the-economists-and-strategists-be-right/article1434137/

[Po_d Mainiac]

1. Because most economists are ignorant..the real dumb ones go on

to be strategists

[Statistical]

2. Profits were horrible last year.

Pretty easy to be up 36% compared to complete and utter crap last year.

Combine that with fact that companies cut costs (inventory, jobs, compensation, capital expenditures) in preparing for the worse it is entirely possible that the 2.5:1 ratio between earnings:GDP will be inflated this year.

Now longer term (3-5 years) you can't keep growing earnings without GDP growth however it is possible for both to be right this year.

We could see 4% GDP growth and 30%+ earnings growth due to reasons I mentioned above.

[bemildred]

3. Well paid tools see what they are paid to see.

Economics is largely a faith-based enterprise, that is economists largely reason from postulates and abstractions ("the Free Market") rather than from observation or experiment,and their purpose is largely to defend the status quo rather than to develop new and better alternatives.