Earnings are coming in largely better than expected. However, most companies are achieving profitability through cost-cutting, not revenue growth. This works only in the short-term. This is not sustainable profitability for two reasons:
- Most cost-cutting is achieved through cutting payroll. This lowers employment and can lead to a deflationary spiral as lower employment leads to lower spending, which in turn, leads to more cost-cutting and even lower employment.
- Cost-cutting can generally only be done temporarily. Eventually, it begins to hamper future growth and profitability.
