In a new report UBS AG argues that a golden era of profitability is over, and that earnings are set to slow.

“We believe an extraordinary era of high profitability is drawing to a close,” it says. “The fundamental factors supporting high profits — including above-trend global growth, productivity gains, slack labour markets, low real interest rates, and weak capital goods prices — are beginning to fade.”

Largely due to globalization, wage and non-wage costs have been subdued, a process that has been instrumental in boosting profit margins this decade, UBS explains. “Recent academic work provides evidence that the integration of much of the Eurasian landmass into the global economy has significantly increased the number of qualified workers, thereby driving down returns on labour and boosting returns on capital,” it says.

“However, in some economies (e.g., the US or Japan) most spare domestic labour market capacity has been absorbed. As a result, the trajectory of unit wage cost inflation has stopped declining and may soon rise,” it reports. “Moreover, capital goods prices are now rising, adding to the corporate spending bill and potentially heralding slower productivity growth. Monetary and financial conditions are also tightening, while sales growth is set to slow.

“Our econometric results point to a gradual deceleration of earnings in the global economy over the next year,” the report concludes. “The chief risks include a sharper contraction of margins than the model predicts or more concerted central bank tightening should inflation pressures build.”