Key insights
- The ratio of US corporate profits to GDP is currently around 8.8%, exceeding Warren Buffett's historical sustainability threshold of 4-6%. This suggests potential overvaluation in the US equity market and a possible correction. However, global comparisons and unique factors in certain countries (e.g., South Africa, Switzerland) complicate the analysis. High corporate profits relative to GDP may indicate unsustainable economic conditions or a shift in economic structure, warranting caution for US equity investors.
I saw this video where Warren Buffett was saying that corporate profits being more than 4% to 6% of GDP is unsustainable. This was at the 2007 shareholder meeting when the ratio was at about 8%.
Currently it seems to be even higher, I'm looking at the last column with the 8.8% for the US.
Source: Net Income / GDP
|Country|Revenue|Rev/GDP|Market Cap|Net Income|NI/Rev|NI/GDP| |:-|:-|:-|:-|:-|:-|:-| |US|$22.1T|72%|$70.5T|$2.7T|12.2%|8.8%| |Germany|$3.3T|65%|$2.9T|$180B|5.5%|3.6%| |UK|$2.5T|64%|$4.1T|$253B|10.0%|6.4%| |S. Korea|$1.9T|103%|$2.7T|$130B|6.8%|7.0%| |France|$1.8T|54%|$3.0T|$163B|8.9%|4.8%| |Italy|$1.4T|56%|$2.1T|$139B|9.8%|5.5%| |Swiss|$882B|88%|$2.3T|$108B|12.2%|10.8%| |S. Africa|$745B|175%|$727B|$41B|5.5%|9.7%| |Spain|$616B|33%|$1.2T|$78B|12.7%|4.1%| |NL|$466B|35%|$1.3T|$58B|12.4%|4.4%|
Is this something to be concerned about, or is it different this time?
I know in South Africa and Switzerland there are a bunch of companies listed on the exchanges that are not actually South African or Swiss companies which inflates the ratios.
Here is the video I was talking about: Warren Buffett on Corporate Profits / GDP