Before you feed a trailing earnings figure into any of the models above, pause and ask what built that number. U.S. corporate profit margins spent the 2010s and early 2020s well above their post-war norm, and most of that expansion is not the result of better management, better technology, or more disciplined capital allocation. It is the cumulative gift of four macro tailwinds that flattered every income statement equally:
Three decades of cuts, culminating in the TCJA drop from 35% to 21%, lifted after-tax margins by several points on their own. The political ratchet on the corporate rate has reversed; do not assume it cuts further.
A forty-year secular decline in interest rates let firms refinance at progressively lower coupons and fund record buybacks at near-zero real cost. That regime ended in 2022. Rolling over debt now reprices it upward, not downward.
Globalization, weak unionization, and a long stretch of below-productivity wage growth held the labor share of national income near a multi-decade low. Re-shoring, tighter immigration, and a more confrontational labor market are reversing this.
The shale build-out gave U.S. industry a structural cost advantage over Europe and Asia. The marginal cost curve has steepened, and the easy gains are behind us.
None of these is a feature of any individual company; mark them back to historical norms and a meaningful chunk of the “record margins” of the last decade evaporates. The implication is not that U.S. equities are uninvestable. It is that you should not extrapolate the last ten years of EPS growth into the next ten, and that any DCF or comparable-company analysis built on recent earnings is quietly inheriting the assumption that taxes stay low, rates stay low, labor stays cheap, and energy stays cheap — four assumptions, each of which has already begun to break.
Two adjustments help. First, when you compare today’s index P/E to its historical average, use a normalized denominator. Robert Shiller’s CAPE divides price by the ten-year average of inflation-adjusted earnings; it smooths out cycle peaks and partially offsets margin distortion. Second, when you set the market risk premium in section 12.0 “Valuing a Stock”, anchor it to multi-decade history rather than the trailing decade. The trailing decade was the tailwind decade.