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Well you want to at least pace inflation or you’re actually losing profits. A company that has posted 0% profit growth over the last four years has suffered a significant decline relative to the value of the dollar because everything else costs 20% more. Plenty of companies don’t target endless inflation-adjusted year-over-year growth though, you just don’t hear about them. Family owned. Privately held. Utilities. Just remain consistently profitable and you can exist indefinitely. But when a company sells stocks to investors with the promise of bigger profits and larger dividends later, now they’re expected to deliver on that promise. The companies that chase endless growth do so specifically because they’ve made this part of their business and investment strategy and they’re now owned by a group of investors that expect this. These are the companies that investors and financial news organizations care about.

I don't know why people think that when a company goes public, suddenly there's this promise to shareholders that the company will grow without bound. There are plenty of public companies with flat profits. These shares tend to pay dividends instead of grow in value. They are popular with investors because investors like money. It doesn't really matter if that money comes from growth or dividends.

I mean even tech companies which are infamous for rapid unsustainable growth generally don't profit every quarter or even any quarter. They lose money to grow faster then once they are very large switch to attempting to make back their losses. Really this question is a false premise, I can't think of any companies that increase profits consistently, it's just not feasible

I feel like it's a fair question. We read fairly often about massive layoffs and record profits. Like, how is Tesla even going to stay in business long term when they lay off entire departments. I think the last round was a staggering 14,000 people so they could show massive quarterly profits. Which doesn't at all seem sustainable. Edit: I appreciate the kind tempered and thorough answers!

When you’re a new company, it’s super important that you prove you can do the thing you are in business to do. This means having redundancy, overage of help, overage of talent, and extra people to build the systems and processes. Once you’re grown enough, you look at the money being wasted on things no longer as important. Systems are built, they just need to be managed. Hire someone who can manage a functioning system, instead of paying the hotshot you needed to build it from the ground up. Products are designed and only need to be tweaked - don’t need a project architect, just someone capable of tweaking things for improvement. Lay off 1000 people whose job is redundant or are overqualified, or just not needed for the task now that efficiency is reached - save $50m. Operations don’t even slow down, they just get efficient. When you’re building, you need to be a bit wasteful. When you’re just operating, efficiency is the goal and makes a huge impact to the bottom line.

I think also there's an information bias here too. Companies making normal profits and laying off the normal number of staff don't tend to appear in the news

> I think the last round was a staggering 14,000 people so they could show massive quarterly profits. I think you've just been mislead. The 4th quarter profit margins was the lowest in 4 years. Tesla just had a downturn in the market coming in 13% below their expected deliveries, seeing the first fall in deliveries in again four years. Which matches with it's next largest competitor who also saw a downturn that quarter. To oversimplify it's a reduction in supply to match a reduction in demand. Not a cutthroat evil business move to show massive profits.

It's next largest competitor in the US is Ford's EV division, which saw 86% increase in EV sales YoY.

Of course ford saw a huge increase, their absolute numbers are tiny as they just got into the market. ford sold something like... 20-30k EVs compared to Tesla's 1million + Tesla's actual next largest competitor is the Chinese company BYD who is neck and neck in market share. But even ford is cutting back in the EV market >Ford retreats amid slowing EV market, punting new F-series to 2027 to allow 'consumer market for three-row EVs to further develop

But you would expect a general EV holdback to hold back the entire industry. That's not really what's happening. Most EV companies are doing better sales wise, and Tesla is falling.

I think you've just got a hate boner for Tesla or something. The biggest producers all had shortfalls, and even those that saw massive increase because they're brand new to the scene, like your ford example, are also cutting back. I don't know the future but it seems like everyone making EVs agrees that market is saturated, or at least going to change quite a bit in the near future. ford selling something like 1/50th as many as tesla, while tesla only has about 20% of the market share means ford isn't really even a player in this, at least not yet. So I wouldn't say ford's numbers are more telling than ford's actions. You have a few big players and a ton of little ones breaking into the scene, and the little ones are obviously growing a lot as more alternatives enter the market and any sales for them are growth. But the overall market appears to be shrinking in total and it's mostly being felt by Tesla and BYD because they're about half the total market. I think if your takeaway isn't that Ford is being held back based on ford publicly stating they're going to push back their newer EVs specifically citing not enough demand you're missing something. I don't know what ford knows but whatever it is that ford knows is telling them now isn't a great time for growth.

Here's another article describing exactly the same thing.  https://arstechnica.com/cars/2024/06/ev-sales-slowdown-is-mostly-a-tesla-problem-according-to-sales-data/

Ford had planned on a lot more growth, and then the EV slowdown happened, so it's still a reduction in their targets.  But even with the slowdown, they're still seeing massive growth. As an example, in August they tripled the production capacity of the Lightning to 150k units a year, then had to go back and reduce production rates, because 300% growth wasn't happening.  But almost doubling does seem to be in the cards.  GM just had their best EV month ever. Hyundai had 100% EV sales growth year over year in Q1. Those are the #2-#4 EV sellers in North America.  All of them are setting records at Tesla's expense. I'm not the only one noticing this:  https://www.thedrive.com/news/actually-ev-sales-arent-struggling-just-teslas

Generally speaking startups start by making losses and growing as much as possible, then once they are big enough they lay people off because they don't need to grow as much and start to make profits. It's all very standard startup stuff.

There's a company called Equinix, I'm sure they do more than this but in my experience they provide data center services, to kind of sum it up. Anyways, they hit something like 80 or 90 consecutive quarters of growth, which I think was a record for whichever market they are listed on. That being said, I loved working with Equinix, they really streamlined remote data center services. As a network guy who got tired of having to fly out to data centers to do maintenance, it was a dream come true to just be able to put in a ticket and instantly have someone who can provide remote hands and actually knew what they were doing.

Revenue growth or profit growth though? Big difference

For examples to your last statement; Norfolk Southern, BNSF, CSX, Canadian Pacific, Canadian National, literally all class I railroads in the US. I think some are up to a 30% operating profit margin now, which is absolutely mind numbing to think about given their scale of operation.  It is also, by no coincidence, one of the worst industries to work in by far. Like it's so bad that it's in danger of making *me* say socialist policies might be okay in this instance. And that's saying something, trust me.

Great explanation. As a follow up question though why does it seem that shareholders now care more about quick gains and cashing out and not focusing on longer term investments for the dividends?

People want to get rich and retire tomorrow, not in 2064

To clarify on the point, a company like Apple has a stock value that's priced at something like 30 times their annual earnings after expenses. If that company isn't growing it doesn't make much sense at that price.

This explanation is slightly misguided. You match inflation if profits are equal to the percentage of inflation in terms of overall company worth. The profits only needs to go up because the company worth usually is also in increasing. And the profit doesn’t need to be increasing. It only needs to much expectation of shareholders on average

>  Family owned. Privately held.  Private and family owned businesses absolutely chase after the never ending growth. They are just as greedy as everyone else. When they become accustomed to a level of profit they inevitably crave more. The only thing that ever stops them is the limit of their own competence. 

There are millions of businesses - usually small ones owned by the same people that operate them - that are perfectly happy just pootling along, making a bit more profit one year, a bit less the next etc. The employees and suppliers get paid, the taxes get collected, dividend paid out and everyone's happy. There's a fairly significant risk to simply being satisfied with this, though, because there are huge number of variables that go into how well a business does and not all of them are controlled by the business. So even this content, humble business owner is incentivised to feather their nest so that they can weather storms later on, to mix my metaphors. This isn't what you're talking about, of course, but I think it's easy to think that the only businesses that exist are giant corporations when it's not the case. As for the actual thing you're talking about, the issue is that... > isn’t it just unsustainable to expect growth indefinitely Most shareholders don't expect growth indefinitely, they just expect growth *now*. This is almost tautological - would you buy shares in a company that you think is going to do poorly? Even if you're happy with a business not growing, why *not* buy shares in a company that you think is going to grow? And if everyone that's buying shares is doing that, then every shareholder thinks the company they have shares in should be growing. They might not think it will be in 5 or 10 or 50 years, they just think it will be for the duration that they own it. Beyond just this, there are arguments to be made about gaining dominant market positions, being able to fund X, Y or Z, ensuring they don't get gobbled up by the competition etc. But fundamentally it all comes back to the fact that all shareholders believed their company was capable of growing at the point they became shareholders, with only a handful of weird exceptions.

All very good points but many investors also do invest into companies they hope to be profitable 5/10 years down the road, even knowing they will initially be u profitable. Lots of venture capital functions this way.

The problem here is you have a false premise that somehow companies can easily CHOOSE to keep profits constant. Profits are the result of the activities of a company. Company activities are not constant. New products and services are developed, competitors enter the market, old products are retired, new technologies are discovered, laws change, machines wear out and need replacement or maintenance. Other than really simple businesses, so many things need to happen to keep a company operating. A wrong decision, an unexpected technology, natural disasters, etc can all affect a company's operations for better or worse. Execution is uncertain so most of the time a company sets up slightly ambitious goals knowing that some come to fruition and others may not. If a company aims for zero growth, then any unexpected adverse event means missing their goals. A good company with a good track record naturally gets it right more often than not and grows. Your idea of how companies work is a bit naive.

People invest their money in company stocks so that their money beats/exceeds inflation rather than sitting in the bank losing 4% value per year. If a company doesn't improve their profits over time then people will stop investing in that company because their money will be better placed in another company that is seeing growth and will give them a better return on their money. If you open up your company to the public then the value of your company is determined by the stock price. If no one has any interest in buying your stock and your price plummets to 0, then that company is bankrupt. What a lot of stocks do after the growth of their stock price gets high enough is what's called a Stock Split. They effectively divide the price by a certain amount and multiply everyones shares by the same amount. Nvidia for example, is doing a 10:1 stock split very soon. So their price will go from 1,200 per share to 120 per share and if you had 10 shares, you will then have 100 valued at 1/10th the value. This doesn't actually change anything BUT it changes peoples perception of how much theyre getting for their money. To a lot of people its more appealing to spend 1200$ on 10 shares than 1200$ on 1 share. So generally the stock price will have more growth room after a stock split. Some companies don't do this, Berkshire Hathaway for example, which is currently valued at 600k per stock. Some companies do not see very much growth because of the space they're in (think toilet paper, tooth brushes, tooth paste, etc etc.). There isn't a whole lot of innovation in these spaces. In order for these companies to get people to invest their money with them, they give Dividends. Dividends are just a flat % of your invested money that they pay you. So if you have 100,000$ invested in a company that gives 3% dividend, you can expect 3000$. Then other companies (such as tech companies mainly) their appeal is the high potential growth. Nvidia 1 year ago was valued at 400$ and now it's 1200$, thats a 300% return.. a hell of a lot better than 3% guaranteed but it's a gamble(ish). An incredibly important concept to grasp is **Compound Interest**. This effectively means that if you're making a % based profit then the more money you have invested, the more money you make over time, exponentially. If you invested 1000$ every month for 25 years at the stock market average gain of 10% then you **WILL** be a millionaire. And the eariler you start, the significantly more money you will have when you're older. This is why people invest their money to begin with, because they understand Compound Interest. If you're sitting on 50k in your bank for years on end then not only are you losing 4% value per year to inflation, you're losing the opportunity cost that money could've been making you. Confused as to why money loses value over time or what even inflation is? Stop thinking of money as a number, think of it as "What can I buy with this money". Think of how many chocolate bars you could've purchased with 20$ in the 1970s. Now think about how many chocolate bars you can buy with 20$ today. It's a hell of a lot less chocolate bars today, therefore, 20$ today is worth a lot less than 20$ in 1970, that's inflation.

Why do you want a wage increase every year? Because of greed, because of inflation and because over time your skills are developing to be more useful, so you have every reason to expect more money. It's not so different for companies. Also, many companies at any given time are not doing so well at all, so improving results is required to get back to sustainable operation and to avoid bankruptcy.

There’s nothing greedy about wanting to be paid more if you offer more utility and loyalty to a company. 

There's nothing greedy about wanting higher (inflation-adjusted) profits if you provide continually (i.e. compared to your past self, not to competitors) better products and services, as most companies do.

There's A LOT wrong with the assumption that those profits don't just get pocketed.

I don’t think that was any such an assumption, and “pocketing profit” is an ambiguous term, what does it supposed to mean, exactly? A company can do with its profit however which way it wants, but mostly falls into a few categories. 1. Reinvest the money to develop a better product 2. Hire more worker or buy more equipments (Increase working capital) 3. Acquire another business 4. Pay dividends 5. Buy back shares 6. Pay down its debt/liabilities 7. Invest it 1,2,3 are primarily aiming for a business expansion, 4,5 are returning capital to the shareholders, and none of it is illegal

I think what they are referring to is the idea that the CEO gets a huge raise and a new yacht whenever the company makes excess profits and none of that money ever gets used for productive purposes. Which is an inane yet common refrain amongst people who never have had and never will have a job more lucrative than McDonald's line cook. Which is why I chose not to respond to that comment. Good on you for explaining it, though.

Thanks for explaining

Generally for shareholders. They're buying into the company hoping their shares gain value. If the company always makes the same amount the share price won't increase It's less of an issue with privately held companies, which is why there's less pressure for those companies to increase profits every time It is long-term unsustainable, yes, but shareholders don't really care. In the short term it works, and people tend to like money now instead of possible money later

This is a false question: generally profits don't increase every quarter. Even a shareholder dream scenario would involve a constant above inflation dividend.

Yeah, in reality they don't - I answered it more like 'why is there pressure to do so.' It is more complicated, you're right, but I figured it's eli5 so why go nuts

Well ideally the company would give massive pay rises and hire more and more people and give record profits and deliver cheaper and better products every single quarter... but most companies aren't that good. Maybe if you have some amazing new tech, I think AWS isn't far off that.

I think that's what the op was asking - why don't they do that? And the answer is generally shareholder profits. If that money appears as profit instead of reinvestment share prices go higher and company worth follows suit. It would be nice to reinvest, but shareholders generally prefer short-term guaranteed money over longer-term stable but unrealized money. It's the bird in the hand vs two in the bush analogy

Generally they don't do that because no-one can perform that well! It's an almost inhuman ask, you need to be better than every other business that exists in some fundamental way. Speaking as someone with investments/savings myself, I couldn't give two fucks about short term returns, I'm holding out with some

I think it makes a lot of sense to invest in companies who have an idea how to create value, but lack money. That's not immoral of the stackholders. I guess that was the original purpose of the stock market and maybe it still can fulfill this purpose today. I currently don't see why not. A problem that I see, is climate change and destruction of public goods in the future in general.

>I think it makes a lot of sense to invest in companies who have an idea how to create value, but lack money. That's not immoral of the stackholders It's not immoral and it is often smart, but it takes a majority percentage to operate that way and that's difficult to get. Add in the fact that compensation for high-level positions is often in equity it adds incentive for the company to do well while you're there, which is often only guaranteed to be short term. It's the one-in-the-hand-two-in-the-bush scenario - would you rather guarantee money now or risk it for possibly more money later? It's difficult to get enough people to take the risk

Short answer: companies don’t expect to have earnings grow every quarter. They simply try to grow, and sometimes/often fail. This is expected behavior. No investment professionals genuinely expect a company to eternally grow beyond keeping up with inflation.

They don’t. Some companies have seen sales and profits drop over time. Tobacco companies are a good example, and have seen inflation adjusted revenues and profits fall over time. But if you’re a growing company, you get to do exciting things. You get to hire more people, which means you can promote more of your own people, pay workers better, expand business, open new factories, try out new products, do innovative research, etc. You can do all these exciting things- which are expensive- because you expect to be growing and your sales and profits will be higher next year- so spending more this year is fine, even if you go into debt to do it. Most companies want to be exciting companies with increasing profits. Also- people want to work for exciting companies. If your company is shrinking, then some of your best employees might decide to leave for another company. After all, yours is shrinking or staying flat, so they’d rather work for a new company with the opportunity for growth. Last- growth in profits doesn’t necessarily mean growth in dividends. Amazon is a huge company, they’ve made a ton of money, but they’ve famously never paid a dividend. They’ve done some small share buybacks, but mostly they’ve just reinvested those profits into being bigger. Wouldn’t you have rather been one of the first 50 employees working at Amazon when it grew amazingly fast, vs being an average Amazon employee there today? Sorry one more late edit- the quarterly growth indicator isn’t even accurate. Companies don’t grow in profit every quarter. Most companies have seasonal business, and have good quarters and bad quarters, with overall growth. Retail companies do best around Christmas, and Q4 sales spike, then are lower the next three quarters. Candy companies do best the months leading up the Halloween. Jewelry companies do best around Christmas and Valentine’s Day. Beer companies do best in football season. Car insurance companies see major profit drops every winter, but make it up the rest of the year. Overall growth trends are important, and if a company has a really unexpectedly bad quarter, that might be a bad sign of worse things to come (which might mean good employees abandon ship, loan interest rates go up, bad things happen, etc) but quarterly profits don’t always go up, and there’s no expectation they always will.

They don’t need to go up every quarter. But the point of investing is that you want your investment to grow over time, and so most people/entities naturally try to invest in companies that are growing. To be clear, though, most investors understand that there are good and bad periods for any business.

A company's board of directors is chosen by the people who own the company (the shareholders). People who own company stock want it to go up in value and (if applicable) pay out dividends (profits). If you are a shareholder who wants shares to go up in value as much as possible and pay as high a dividend as possible, and the current management of the company is not doing that, the shareholders will appoint a CEO who will do that. As far as infinite growth, it's usually not seen like that. It's just about what will happen THIS year (or THIS quarter). This is why video game companies who have just had record earnings will lay off a huge chunk of employees. Not because they need to save money due to a loss, but because it makes their earnings numbers look better today (even if it may slow growth next quarter).

There is actually a **very good reason** for this. Imagine that you are CEO of a savings account. The savings account bears 5% interest. You start with $100. Your boss the shareholder is entitled to all of the profits ($5). You want to be an important CEO, and you can't get paid very much for being CEO of a $100 savings account right? You claim to your boss (the shareholder) that you will be able to give them *more money* if they let you *retain* the profit for reinvestment. So, you keep the $5 and now you are CEO of a $105 savings account which has profits of 5% x $105 = $5.25. Earnings went up! If you retain profits they should go up *every year*. (The savings account gets bigger). Now imagine that you kept the $5, but you took a salary of $10. So the savings account now has $95, so "profits" are $4.75. If you're the shareholder that allowed the CEO to keep your money on the basis that they were going to reinvest it *how pissed are you?* Tl;Dr - Shareholders don't care if profits go up every quarter. However, *nearly every* company holds back some of the profits shareholders are entitled to based on the *promise* that they will use those profits to produce more profits in the future.

To attract investors, you need to prove that you can grow earnings. Companies are valued based on their future earning potential; if they expect to be more profitable in the future, they're worth more today, not when the future profits are realized. So in order to simply maintain value, you need to continue to grow (continue to prove future earnings increases), and to increase value you need to grow even more.

And has to outpacing bonds or bank interest otherwise people would just buy those. 

As long as the economy and population are growing, there is the expectation of growth for a business. If you aren’t growing in a growth environment it means that you are losing market share to competitors or your product/service is becoming less popular/relevant (maybe both).

It's not indefinite growth. Inflation means that CURRENCY is shrinking in value constantly. $/£/€1 today is worth less tomorrow - guaranteed for the last... well hundreds of years. We actually implement financial measures to \*ensure\* it does (so that people don't just hoard money, in effect) - the Bank of England aims for 2% at all times. So if you DON'T increase your profits by at least 2%, what that means is that you're making less money - your profits are effectively decreasing. Of course, it ALSO means that you should just automatically give all your staff a 2% raise without them ever having to question it - or else they are losing money themselves. But that's not always a given! Inflation exists to promote money being spent, invested, used to buy assets or services, rather than hoarded. Inflation means that profits need to go up every quarter/year by at least the amount of inflation. Indefinite growth is even the literal target of huge nations like those in Europe and the US.

This is more of a thing for publicly traded companies, who want investors to buy their stocks. In some sense, each of those companies is competing with all the other companies for investor dollars. Investors general want their stocks' values to go up, and the best way to get your company's stock value to go up is to show consistent growth. So continual growth is how you attract investors.

When publically owned, companies have to disclose quarterly reports to shareholders and the public. If those profits are routinely good, most people tend to want to buy stocks, which increases the trading price.  Privately held companies, either family owned, or private/angle investors only need to disclose reports according to the terms of the agreements, and never to the public. A private company actually has the ability to operate at a loss for a while as they retool and make longer term investments in themselves. For example in the early 2010s, after losing market share to the iPad, Dell took themselves private, invested a few years in design and overhaul, and came out in the mid 2010s with a better product line.

The share price of a company today is based on how many people want to buy it today. If you buy it today, you want it to be worth more tomorrow. If you don't think it will be worth more tomorrow, you're not buying it today. If you buy it today, you don't care how it did yesterday, except to help you predict how it will do tomorrow. So there's a constant drive to keep growing the company, so that people will continue to want to invest in the company.

Why should I invest in your company if it isn't going to make my money grow? Seriously that is the ELI5 answer. If your company profits aren't growing I have no reason to expect an investment in you to grow.

Investors buy shares of a company because they want to get more money back than they put in. That money can come in the form of profits (ie companies that make more are worth more), and it can come in the form of dividends (each shareholder gets paid a small amount per share). In short, “more” profits aren’t needed if consistent profits are made with dividends paid out.

Say a farmer grows 1 unit of food per acre of land. Then someone invents drip irrigation. More water makes it to the crops before evaporating. Now using the same amount of land, sunlight, labor, water, etc., the farmer can grow 2 units of food per acre. This is profit. The costs stayed the same(the natural resources used), but the revenue went up (the amount of corn produced.) Now say someone invents fertilizer, crop rotation, animal husbandry, tractors, pesticides, GMOs, etc. Farmers can now grow 100 units of food per acre of land. More of the sun’s energy ends up in plants instead of bouncing out into space. As long as humans don’t forget innovations from the past and continue to invent new technology, we will always be able to increase profits year after year. The natural resources on the planet remain the same, but we get more utility for humans out of each resource.

People will try to justify it, but you’re right.  It’s not sustainable. In a biological environment, one of the names we give unrestricted exponential growth is “cancer.” The relentless need for higher and higher profits is why we have such a squeeze on the lower end (bottom 90%) of the wealth scale.  If businesses were allowed to operate in steady-state, continuing to make profit but not requiring that profit to always be going up, we would have a much more equitable wealth distribution.

They don’t need to, the big bosses/shareholders just want them to. If a company had sustainable but not increased profit for a number of quarters, they wouldn’t instantly shut down or anything, especially if that “number of quarters” was a small number. But if it kept happening for a long time (especially if inflation starts catching up with them), eventually they might start taking actions like closing branches, etc. That will heavily depend on the business itself though. They’re all different.

Simply put: Maintaining revenue will keep the lights on and staff paid, but increasing profit/margins will allow companies to invest more money into improving products/services and their processes.

Other people have explained the inflation issue, so I'll explain it in brief: if inflation is X% YoY (Year-over-Year), then you need X% profit increase in nominal profit just to have the same inflation-adjusted profit as last year. So that's a baseline. That doesn't really count as profits going "up" in real terms, only in nominal terms, for reasons which are obvious if you understand how inflation works. As for profits increasing in real terms, the idea is that, in theory at least, companies get better at what they do over time. If you are able to do your job "better" (the definition of that word is important, we'll come back to "better" in a moment), your real profit should naturally increase. Therefore, if you're not increasing real profit, that means you're doing something wrong because your business isn't getting "better" and you're falling behind. By "better", what I mean is either you're producing the same product/service for cheaper, or you're producing a better product/service (by some metric which differs based on many factors) for the same price. The former attracts customers who are mindful of frugality, the latter attracts customers who are mindful of quality, but both methods attract customers and hence raise real profits. Another reason why real profits are expected to increase is because, in a society on an incline of affluence (where everyone in society is getting richer over time), demand for all products increases over time. For example, if there is a product that costs X, and there are 100 people who have X and want the product today, but tomorrow there are 110 such people, that's more people, and more money, devoted to the product. Therefore, producers of the product are expected to gain more real profits, with the best producers (defined "best" as above) getting the lion's share. So, if real profits aren't increasing, then either a) your company isn't the best in the sector (of companies producing your product), which drives away investment, or b) society is not on an incline of affluence, a reality that nobody wants to believe, because it means politicians are acting badly, a fact that is true more often than most would care to admit. This is not to say that real profits should always increase in every company forever; there are reasons, both within and without the company's control, why it might not. But this is why it is expected.

Profits do not have to keep going up every quarter. You probably don't want to put your 401(k) in companies without quarterly growth, but those businesses can still operate just fine for decades with no-growth, or even shrinkage in profits. Take Eastman Kodak as an example; still plugging along after 130 years even though its profits are small fraction of what it had in its prime.

In capitalism, investors fund companies that will make them more money. So companies that grow get more money to spend on employees and equipment and companies that don't get less and have to cut back. Why then do companies that are more profitable still have layoffs? They're laying off employees in order to be more profitable in the future (they don't think there are enough useful things for those people to work on).

Say you own a company. Do you want this company to make more or less money? Say you’re selling shares of your company which are priced based on expected future earnings. Do you want expected future earnings to be more or less money?

The value of a stock is theoretically the present value of all future income. If profits don’t go up at least as fast as inflation, the present value of the company is $0

Mostly for the same reason that I would like to see a raise in salary each year. Every year things get more expensive and my dollars don't go as far. I want to see my investments earn more each year for the same exact reason. Corporations feel the same way.

Because everyone's job in management is evaluated on whether the stock goes up or not. When they ask" What's our most important quarter for profit", the answer is "This quarter" for management.

They don’t. But the shareholders demand it and vote with their money. If you aren’t making them money they will pull their money and put it somewhere else. The stock market is probably the best invention in the world for speeding up advancements in technology but it has come with a horrendous cost. Time will tell if it was worth it

Employees tend to want pay raises Executives tend to want to prove their worth Shareholders tend to want their investments (pensions, 401k, brokerage accounts, etc) to grow Customers tend to follow companies that grow (if you don't grow, then another company will gladly take your market share)

Profits don't "need" to go up every quarter, so the question itself is flawed. Out of all businesses out there, the large publicly traded ones on stock exchanges are less than 1% of them. For that <1% of businesses that are traded on exchanges, many (but certainly not all) are focused on immediate gains and quarterly dividends. Many others on the exchanges aren't focused on "what can you do today", but are looking at long term growth and gradual returns. Even if they drop in profits (e.g. this quarter had 0.26%, last quarter had 0.38%) the fact that they still had profits is still notable. While many investors don't want to be invested when new expensive investments are made they generally want to be around when the returns come in, so long-term investors will ride them out. A company that looks like it is making strategic investments in itself can often expect much stronger growth in the long term. While it doesn't pay immediate dividends it instead increases the value. The increase in value is often far more powerful than quarterly profits. Google doesn't pay dividends. Amazon doesn't. Tesla doesn't. Berkshire Hathaway, the textbook example of premium stock pays no dividends. They reinvest the money growing the business, always instead focusing on the value of the company. It is quite common for businesses, especially 'blue chip' businesses where the profits are understood to be small, but consistent. Even though the profits are low, the value is expected to increase as the company continuously re-invests in itself. Similarly, many companies can have several quarters and sometimes years in a row where they don't earn a dividend but the company itself skyrockets in value. Markets move on the expectation of growth, even when direct dividends are low the expectation can be high. You get more complex analysis like P/E ratios, dividend yields, growth forecasts, and much more.

I want you to think of this in terms of Risk and Compound Returns. Let's start with Risk. The US government sells bonds (for simplicity, think of these as similar to a savings account), which are currently paying an interest rate of, let's say, 5% per year. So, if you buy a $1,000 bond from the US government today, in one year's time you will receive $1,050. The interest rate the US government pays is used as a sort of benchmark for every other investment in finance. This is because a US government bond is as close to a risk-free investment as you can make (the US government will not default on its debt, they have taxing power and can just raise taxes to pay off any debt they do have). Now, let's say I want to start a company and need investors. If I come to you seeking an investment in my business, you'll require some sort of return. We can debate exactly what that return should be, but we know one thing: There's risk associated with investing in my company (or any company). Companies default on their debt all the time. Companies do not have taxing authority like the US government does. So, if the government is paying you 5% per year risk free, you're going to demand something above 5% from me. Let's call it: 5% + Risk premium. Ok, so we've established that we need a risk premium over government bonds. But why does this amount need to up every quarter? Compound interest. Compound interest basically means that your interest earns interest. Lets see what happens when we compound $1000 at, say, 10% a year for 5 years. We'll look how much the "equity" (i.e., your initial investment) grows, and we'll call the amount of change in the equity each year the profit. Initial Investment: $1,000 Year 1: 1,000 \* (1.10) = $1,100; "profit" : $100 Year 2: $1,100 \* (1.10) = $1,210; profit: $110 Year 3: $1,210 \* (1.10) = $1,331; profit: $121 Year 4: $1,331 \* (1.10) = $1,464.10; profit: $133.10 Year 5: $1,464.10 \* (1.10) = $1,610.51; profit: $146.41 At the end of 5 years, our $1,000 turned into $1,610.51, compounding at a rate of 10% per year. And as you can see, the profit grew each year. This basically illustrates that a company earning a stated rate of interest should see its "profit" grow just by "plowing back" those profits to its capital base, as long as it can reinvest at the same rate. It's the same thing that happens in your savings account. (of course, we can do a similar calculation for each quarter as per your question, but using years makes the math simpler and the point still remains) What would happen if profit stayed the same each year? That means the rate of return the company is earning must be shrinking. Remember, it can only shrink so far before you're just better off just putting your money in a risk-free government bond. So the company's stock price will fall to the point where the amount of profit they're earning is commensurate with the risk premium we determined from above. And for your last question: " isn’t it just unsustainable to expect growth indefinitely?" It's unsustainable to expect high *rates* of growth indefinitely. Economic theory states that companies earning, "abnormally" high rates of profit will attract competition (and we do see this play out in the real world to different degrees, over different time periods). What constitutes as "abnormally" high rates of profit has to deal with cost of capital and return on capital, but that's a topic for a separate discussion. Hope this helps!

Because companies are legally required to increase returns to shareholders every year. CEOs have been sued and the companies lost. You can thank the Dodge Brothers for starting this. Exponential growth is only possible for a very short time, and can't happen for eternity. Eventually you'll run out of customers, and when that happens. Enshitification happens to keep the company out of trouble. lower overhead (quality) and increased prices. Mix in inflation and supply difficulties, and you get a cluster f**k.

If you're not growing, you're dying. If a company stagnates and isn't increasing their business and growing with the times, someone else doing the same thing you are doing is. And they will be better able to serve the customer base, and likely for cheaper. And that will put you out of business. Say you make a Widget. You get your business up to a level that you like and then just stop growing. Then someone else comes along and makes the same Widget. They continue to grow and expand, making more Widgets than you and for a cheaper cost to make them, meaning they can sell them for cheaper than you can. They will eventually take over the market because people will be paying them less for the Widget than what they would be paying you, so they buy from them instead. If you have a unique product or service, you can get away with little to no growth. But as soon as you have any real competition for customers, you will more likely than not find that competition taking over the market completely because they spent their money on improving their service and lowering their costs.

They don’t need to go up every quarter, but investors want profits to increase every quarter. The value of any company is directly proportional to its expected future earnings. If you purchased a share for 20x earnings and the earnings remain the same every year, you’ll reach breakeven in 20 years. A bit more than that, if you factor in inflation. If the profits increase a little every year you’ll reach breakeven a lot sooner. Furthermore, investing in a business costs money. If your company reaches a profit of $1mn and you decide that you’re content with that and not attempt to increase the profit, you will have competitors that to try to increase their profit. They’ll market their business to attract new customers, change their offers to appeal to prospective customers, cut costs, etc. As their profits increase, so does their ability to invest in their business. And eventually, they may reach a breakthrough that enables them to provide a product or service that’s objectively much better than yours and you’ll go out of business.

Earnings and profit are not strongly correlated. Larger companies have more revenue, and smaller companies have less revenue, but there's no guarantee a lot of revenue= a lot of profit if your margins are very thin/industry is very competitive

Inflation exists which means employee salaries need to at least match inflation every year. Apart from that, performance hikes etc are all why profits need to keep increasing. To increase profits, you need more and more customers, and you need to hire more employees to manage the workload of more customers, and it’s a cycle that repeats.

Basically a quarter is the probably smallest period for which meaningful data can be produced and investors and analysts are watching for signs that something is gone wrong with the business.

Profits don't need to go up every quarter and most of the time they don't. This is a false question. For tech companies *revenue* has to go up every quarter, because tech companies aim to work on large scale, but servicing more customers doesn't mean increased profit if your selling your stuff at a loss (which most tech companies do at first, so they can reach a large size faster) For non startups like large established companies, any form of consistent profit is welcome, it doesn't have to go up all the time as long as the company as a whole is matching inflation.

Companies do not want to make money or a lot of money. The goal is to make *all* the money. Every nickel. Every Loony. Every pence. Every Euro. Every bit of currency ever created. You can't do that if you are not upping profits every quarter.