A few weeks ago, on the Odd Lots podcast, Joe Weisenthal and Tracy Alloway profiled a paper that describes the dilemma we’re in. It’s titled “A Macroeconomic Perspective on Stock Market Valuation Ratios,” and it’s by three economists, Andrew Atkeson, Jonathan Heathcote, and Fabrizio Perri.
What they were trying to describe is why the stock market is so high, what most people consider to be at a historically inflated level. What these economists show is that this inflated value has a structural explanation. American corporations have dramatically lowered their share of output going to workers since the 1980s, and have also reduced the amount they are investing in new factories, software, robots, et al.
That means they can return more to investors in buybacks and dividends. So the stock market is not high relative to the amount investors are getting back. How do companies sustain such low levels of investment and hiring, and such high profit margins, without encountering competition? Well these are conflict-averse economists, so they shy away from saying anything interesting. But the final line in the paper is as follows:
A final possible explanation for the strong observed growth in earnings absent growth in measured investment is that firms have enjoyed an increase in monopoly power in recent decades, and that this has allowed them to earn greater pure rents or “factorless income” that is not income to capital.
We have all noticed the increased concentration of business sector to oligarchical levels. Also the increasing level of income inequality in the nation.
Big American companies are piling up profits despite war and consumer anxiety, bolstered by healthy sales growth.
With just over one-fourth of S&P 500 companies reporting results for the first quarter, Wall Street’s expectations for earnings suggest big U.S. companies are far healthier than wider economic concerns might indicate.
Yet the biggest U.S. public companies are seeing profit and revenue surge. Year-over-year growth in earnings per share is expected to exceed 13% for the sixth quarter running, according to estimates from financial-data firm LSEG. Sales are expected to rise more than in any quarter since the fall of 2022.
Corporate concentration has been rising for a century, according to research from the University of Chicago Booth School of Business. Typically, fewer than 1 percent of corporations now account for more than 90 percent of corporate profits.
Fewer, bigger firms tend to have more pricing power, which translates into fatter margins. Ownership matters, too. A 2025 Chicago Fed study found that a one-percentage-point increase in concentrated institutional ownership of a firm is associated with a 0.17 percent reduction in its payroll — evidence that dominant shareholders are pressing companies to keep labor costs lean.
Put another way, they are increasing productivity by reducing manpower needed to provide goods and services. What is wrong with that? How can economists be opposed to that.
Yes, better ways, computers, AI, automation, and outsourcing labor intensive jobs are all part of that. Yes, our economy grows with less labor.
It’s not about reduce number of employees but reduced share of income going to the bottom 90 percent of workers.
This short analysis extends the results from a prior study about the gap between what the majority of workers earned from 1975 to 2018 and what they would have earned with more evenly distributed income growth
How about using old fashioned economic laws of Supply and Demand? The value of the stock market depends on the amount of money available to buy shares. A century ago bonds were investments while stocks were speculation. This mantra has changed, even the government is promoting stocks via IRAs and similar investment programs which are made up of ordinary peoples’ wealth. Maybe the model is what the Chicago Boys proposed for Chile.