Rates-Addiction, Profit-Addiction?

The past two years have witnessed the effects of those who have super low interest rates on their mortgages as rates climbed rapidly: they cannot give them up. Some cannot give them up because of affordability issues, but most are holding tight because they are so infatuated with their low rate and the savings (and earned interest) this delivers. They are addicted. They don't want to give up their low interest rate. But another addiction is brewing, profit-addiction!

Corporate America has witnessed unprecedented profit growth in the past few years as the US has grown dramatically since covid struck in 2020. While most were decrying high inflation, few mentioned just how much wealthier those with assets were becoming. The S+P 500 has almost doubled in 5 years, median US home prices are up almost 29% (even after adjusted for inflation)as a result of GDP growth, cheap capital, inflation and much higher corporate profits. In the third quarter of 2024, US corporate profits - after tax - was 11.63%, which is over 60% higher than the long term average of 7.24%. Many builders prefer building more expensive homes too because they are more profitable. Lots of this profit growth was possible because of higher prices attributed to higher inflation-fueled labor, transportation and materials costs, cheap capital, stimulus, lower taxes, tech efficiencies but a big chunk was simply a result of 'because-you-can' pricing blamed on high inflation. 

We have all benefited - and suffered - from this: those who own stocks directly or indirectly and hard assets have seen those prices soar. But this has also helped fuel inflation, so our money buys us much less today than it did 5 years ago. High prices have fueled political outcomes too. We seem to want both higher valuations AND low prices: is that realistic? Now we have to ask: are we addicted to these higher - and growing - profits? Have the expectations of Wall Street for double-digit growth helped fuel this addiction? And most importantly if we continue this expectation will prices have to continue rising, thereby fueling inflation and fueling the Fed's interest rate policies?

Addiction hardly ever ends well. Often most addictions are broken with a major event or grief. We have witnessed the five stages of grief around interest rates and only recently do we see many reaching the final stage acceptance. Can we break our addiction to rising valuations fueled by rising profits?