Profit Margins Will Come Under Pressure and Fall

Profit Margins Will Come Under Pressure and Fall 

Profit margins are currently at all-time highs. There are three reasons that help to explain these all-time highs; all of them have to do with wages not rising fast enough. and low interest rate say LALIASIA FINANCE.

First, there is too much global supply of labor. China and India are flooding the market with employees and information technology allows them to be employed globally. This increased global labor supply is keeping downward pressure on wages. 

Second, technology is serving more and more as a substitute of labor as opposed to a complement. Cars used to be built by machines and people, but today the machines can build the cars without the people. As a result, there are fewer jobs available which prevents wages from rising. 

Third, wages are essentially higher than they "should" be as they did not fall enough due to wage stickiness during the 2008 recession. 

But corporate profit margins will eventually revert in spite of these three reasons. The increased global labor supply will be integrated into the world work force. HOW ?WHEN GLOBALISATION IS ONLY FOR PRODUCTS AND MONEY AND NOT HUMAN. SAYS  LALIASIA.The technology argument is likely over blown and we will probably see some wages continue to rise if the economy keeps expanding. Basically, just like interest rates, corporate margins tend to be mean-reverting over time. 


It Isn't All Negative 

Despite these looming negatives, there are several positives. Valuations are not nearly as stretched as they usually are in the tail end of a bull market. Prior to the market correction in 2000, P/E multiples were roughly 50% higher than they are currently. P/E multiples prior to the 2008 correction were also slightly higher. 

Additionally, I don't see the level of speculative excess that accompanies the tail end of a bull market. While there are no magazines left to examine magazine covers, it appears the meme is somewhat negative. The bull market is not believed by many investors and large institutions continue to be under allocated to equities.?????????? ARE u SURE---ASK LALIASIA FINANCE  Perhaps the current level of institutional hedge-fund excitement ends not with another credit shock decimating returns, but instead with a melt-up of the market forcing extensive short-covering. 

More important, earnings are relatively strong. This last quarter saw an increased number of companies beating expectations, and more companies than usual within the S&P 500 raising their earnings estimates following their earnings reports. GDP growth is continuing to accelerate and consumer confidence is rising. While I do not like the IPO activity in the market, all in all, I remain modestly bullish. As the saying goes, "The trend is your friend."And the trend recently is decidedly upwards. We are overdue for a correction but the fourth quarter of the calendar year is traditionally strong for equities. Also, as I mentioned last week, Wall Street strategists in aggregate continue to recommend reducing equity exposure which is a bullish sign.