One of the main reasons the market has recovered so quickly from its lows during the recession is strong corporate earnings. Market bulls argue that earnings growth should continue to propel the market forward. But what is often not discussed is the means by which earnings have recovered: exceptional profit margin expansion. The following graph (part of a Special Report from Comstock describing why they are bearish on the market going forward) illustrates the profit margin for the S&P Industrial Average over the last several decades:
4 comments:
Is this shown ex-financials? Extraordinary government aid was a clear impetus to recovery of profit margins in that industry and may be juicing the speed profit recovery through that channel. Even ex-financials, government aid through extraordinary unemployment benefits and lowering of interest rates benefits all companies. I would argue that the lowering of interest rates happens normally, however, and the Fed QE action has not had any appreciable effect on interest rates (which are probably already at their lower bound).
Is there any information on years prior to 1955?
Another interesting thing is the relative downtrend in margins and the uptrend in the S&P starting in the 1980s.
Alex-
Perhaps you are on to something. Record low interest rates could help provide record high profit margins. But I'm not sure if that would explain the swings at the start of the decade.
Right - and I'm saying it's NOT the interest rates making this profit margin recovery extraordinary precisely because interest rates are usually cut dramatically in response to large economic downturns. Would think that it's rather something else, perhaps the unemployment support, the lifelines extended to the financial industry, etc. But probably government support in some form, it's the only thing that makes sense.
How about record unemployment (labor cost is more than 2/3 of the cost structure)...
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