One of the most controversial stories of the economic recovery has been the historically
high corporate profit margins.
Not exact matches
Corporate profit margins have been rising for 15 years and are now near their
highest levels ever.
Corporate profits and
margins have continued to remain
high despite the difficult macro-economic environment of the past five years.
Although
higher wages add to
corporate cost bases, wage acceleration hasn't historically hurt
profit margins.
That puts pressure on
corporate profit margins and theoretically should lead to
higher inflation.
With
corporate taxes being cut to 21 % from 35 %,
corporate profit margins before the tax relief already near record
highs, and the window open to tax - efficiently repatriate foreign earnings, one would logically conclude that corporations should be in robust financial health.
The
corporate sector appears to be well - placed to fund ongoing capital spending, with
corporate profits increasing by 13 per cent over the year to the December quarter and
profit margins at their
highest level in over a decade.
While we continue to find selective value in the dynamic US
corporate sector, many US companies have broadly
high valuations and extended
profit margins, which makes our search for value challenging.
On a number of metrics,
corporate profit margins have reached multiyear
highs and exceeded prior - cycle levels.
Even considering the combined effect of somewhat greater international sales on somewhat
higher profit margins, it is impossible to account for the overall change in
corporate profit margins on that basis.
While we continue to find selective value in the dynamic US
corporate sector, many US companies have broadly
high valuations and extended
profit margins, which makes our search for value challenging.
Now I am clear why
HIGH profits are negative for the economy and why — unless deficit spending, money printing or QE INCREASE — then
corporate profit margins will collapse, perhaps violently like in 2008/09 — see chart above.
In general, stocks are not cheap, especially if you consider that
corporate profit margins are hitting all - time
highs.
To top all this, they are doing it when
corporate profit margins are at an all time
high.
For a full - fledged crisis in US
corporates, we need the current
high issuance of
corporates to mature for 2 - 3 years, such that the cash is gone, but the debts remain, which will be hard amid
high profit margins.
To be sure there are still some legitimate concerns with today's market including
high valuations and much
higher than normal
corporate profit margins.
For example,
corporate leverage is approaching record
highs, just as
corporate profit margins are beginning to stall.