Corporate profits and stock returns will be meaningfully lower in the years ahead as key drivers such as low interest rates and corporate taxes fade, according to new research from the U.S. Federal Reserve Board.

A research note from a Fed staffer argued that public company profits have been boosted over the past 20 years by declining interest expenses and low corporate taxes. These factors account for one-third of profit growth for S&P 500 companies over that period, it said.

Now, with these profit drivers likely to evaporate, the paper forecast “notably lower profit growth, and thus stock returns, in the future.”

According to the report, before the global financial crisis, the ratio of interest and tax expenses to earnings for the S&P 500 was about 45%. That dropped to 26% in the first quarter of this year, leaving a greater share of profits for shareholders.

However, the report argued that this ratio is unlikely to fall further from current levels.

Interest rates already reached rock bottom levels in response to the pandemic and are now rising, making it tough for interest expenses to decline, it noted.

Lower corporate tax rates don’t appear likely either, the report said.

“Indeed, the 15% corporate minimum tax that was part of the recently passed Inflation Reduction Act took a step in the opposite direction,” it said.

The report concludes that “a reasonable forecast for the longer-run real growth rate of corporate profits is probably in the range of about 3% to 3.5%, but it might be even lower.”

Absent an increase in stock price multiples, equity returns are destined to be in the same range, it said.

“The overall conclusion, then, is that — with the expected slowdown [in] profit growth and the associated contraction in P/E multiples — real longer-run stock returns are likely to be notably lower than in the past,” it said.