Negative Implications of Falling Corporate Profit Margins

In his MarketWatch column, Mark Hulbert explains the distressing news buried by much of the recent positive reporting on the upward revision of GDP earlier this month. “Though the government’s upward revision of GDP growth looked positive on the surface,” he says, “a deeper look at the data shows the stock market currently is on shaky ground.” The report revealed that corporate profit margins (profits as a percentage of GDP) “experienced one of their largest quarterly declines in years.” Hulbert points to historical data (depicted in the chart below) in predicting that “shrinking profit margins will almost surely cause stock […]

Fisher: Time To Think About Margins

With the bull market around its halfway point, in his estimation, Kenneth Fisher is focusing on “big, fat stocks” — that is, large-caps with fat gross profit margins. “It works because fat gross margins offer a firm more discretion to fine-tune its future. Invest in more research than peers do. Or market more. Or afford more capital expenditures. Or, or, or!” Fisher writes in his latest Forbes column. “It renders more reliable future earnings — the very theme my research shows that later-stage bull markets love.” By “fat”, Fisher says he means “above 50% and higher than the industry’s average”. […]

Montier Not Finding Much Safety

James Montier and GMO are known for their conservative, cautious approach — a mindset that has helped the firm often recognize market and economic problems well ahead of others. So, what scares Montier right now? The lack of assets offering a “margin of safety”. “I just can’t find any assets that have a particularly high margin of safety,” Montier tells Advisor Perspectives. “There is nothing that reaches out and screams, ‘Hey, I’m really undervalued.’ Therefore, you are in this situation where you’re stuck in this kind of foie gras market where you’re being force-fed risk assets. That is a very uncomfortable […]

Sonders on Why Those High Profit Margins Aren’t So High

In recent years, there’s been a lot of talk about how profit margins have reached unsustainable levels and will revert to their historic mean, which would have negative consequences for both corporate earnings and the stock market. But in a new analysis, Charles Schwab Chief Investment Strategist Liz And Sonders provides some interesting data indicating otherwise, saying that margins may continue to expand — or appear to continue to expand — even though earnings growth has peaked. In commentary posted on Schwab’s site, Sonders notes that some common measures of profit margins — most notably the ratio of US pretax […]