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Profit Margins

May 06 2022

Peak EPS: Another Critique

  • May 6, 2022

It’s only been a few years since we added the Peak P/E ratio to our suite of market valuation measures. That situates us in the uncomfortable position of having to explain why a big decline in this newer metric might be misleading.

Apr 07 2022

“Gapping” Lower?

  • Apr 7, 2022

NIPA’s “all-economy” profit margin declined a bit in Q4—which typically peaks before SPX profits—and that falloff coincided with the economy officially reaching full employment, based on the CBO’s Nominal GDP Output Gap. When the Output Gap has flipped positive (like in Q4), corporate profit margins usually come under immediate pressure.

Apr 07 2022

Earnings: Reversing The “New Normal?”

  • Apr 7, 2022

If earnings’ nearly vertical ascent continues for another six months, 12-month trailing EPS will intersect the 6.9% long-term-growth trend line connecting the five major EPS peaks between 1974 and 2007. The “New Normal” has given way to the “Good Ol’ Days!”

Feb 05 2022

Bubble Or Not? Two Valuation Takes

  • Feb 5, 2022

In early 2018, we thought the market was expensive, but certainly not a bubble. Today, the trouble is not just high P/E multiples, but the sustainability of the “E” itself—with profit margins nearly 20% higher than ever before. Whether one believes U.S. Large Caps are engulfed in a bubble or not, we have a P/E ratio for you.

Jan 07 2022

New-Era Profits, New-Era P/E Multiples

  • Jan 7, 2022

The current mania won’t last forever. But our use of the “New Era” label in describing the last-quarter century or so of stock-market dynamics is still useful—in part because it highlights fundamental developments that simply cannot be repeated indefinitely. 

Dec 07 2021

Full Employment Brings Margin Risks

  • Dec 7, 2021

How high can corporate profit margins go? The third quarter saw a new record of 11.0% in NIPA “all economy” after-tax margins, and figures for the S&P 500, due out in a few weeks, will also set a record.

Nov 05 2021

A Marginal Measure Of Margins?

  • Nov 5, 2021

For those believers in a new economic- and stock-market era, there’s good news. The CPI-PPI spread has not been an effective proxy for profit margins during the 1995-to-date “New Era.” But, the failure of an inflation measure during a mostly non-inflationary era shouldn’t come as a surprise.

Nov 05 2021

“Into The Weeds” With Normalized EPS

  • Nov 5, 2021

The environment where massively above-trend federal outlays have generated massively above-trend readings in both current and projected S&P 500 EPS, the idea of normalizing EPS over a period as long as five years might seem hopelessly out of touch. But it’s during times of extraordinary conditions—both good and bad—that render this work especially valuable.

Oct 15 2021

Long-Term Returns: You Wanted The Best, You Got The Best!

  • Oct 15, 2021

In a possible sign we’re not getting enough oxygen at current valuation altitudes, we decided to replace the usual mean-reversion technique with a much friendlier approach that we’ve dubbed “maximum attraction.”

Feb 07 2020

Superhuman Feats Got Us Here

  • Feb 7, 2020

The simultaneous “New Era” ascension in margins and P/E ratios hasn’t generated anything exceptional from a return perspective. To the contrary, annualized S&P 500 total returns over this 25-year period of margin magic and (mostly) escalating P/E ratios merely match “Old Era” returns.

Jan 24 2020

What’s Embedded In The Consensus?

  • Jan 24, 2020

Market momentum now seems to outweigh simple math in the minds of most investors, and we are not entirely immune. Today our tactical funds are positioned with net equity exposure of 50%, the midpoint of the normal 30-70% range. That’s a higher allocation than if we considered only business cycle dynamics and equity valuations.

 

Jan 15 2020

Small Cap Quality Check

  • Jan 15, 2020

December’s Of Special Interest provided a recap of our Asset Allocation team’s view of small cap equities, suggesting that small caps had underperformed and reached a valuation discount that made them an interesting contrarian value proposition. Several clients responded with follow-up questions, wondering if the discount valuation of small caps was offset by their typically weaker business models.

Jan 08 2020

Are Earnings Set To “Gap” Higher?

  • Jan 8, 2020

We are troubled that the bullish optimism has spilled over into the 2020 estimates for S&P 500 earnings. Zero growth in 2020 is probably not a bad guess for NIPA figures, but S&P numbers don’t always follow suit.

Jan 08 2020

It’s Not What They Borrowed, But How They Used It

  • Jan 8, 2020

Following the deflationary bust of 2007-2009, the last decade was expected to be one of deleveraging. Only U.S. consumers appeared to get that memo, however.

Jan 08 2020

A Spectacularly Average Thirty Years

  • Jan 8, 2020

In the spirit of good holiday cheer, we made a partial concession to the True Believers with a December “Chart of the Week” in which we narrowed our stock market valuation analysis to the historically elevated levels of last 30 years.

Jun 07 2019

Allocation Implications Of Full Employment

  • Jun 7, 2019

While the economy’s move above its full-employment level carries reliably negative implications for profit margins, the impact on equity returns has varied greatly from cycle to cycle.

May 31 2019

An Economy This Healthy Is Hostile To Profits

  • May 31, 2019

It’s hard to grow profits when an economy’s resources are already fully employed, a fact we highlighted when the U.S. Output Gap turned positive several quarters ago. Therefore, the first quarter drop in NIPA corporate profits, reported yesterday, shouldn’t have come as a surprise.

 

Apr 12 2019

Margins Prove Capitalism Still Works

  • Apr 12, 2019

Corporate profits were outstanding last year, but even the benefit of a 40% cut in the top income-tax rate wasn’t enough to lift the net profit margin back to the all-time high of 10.6% established in early 2012. Still, the latest 10.0% figure is more than a percentage point above the 2007 cycle high and about two points better than any other cycle high.

 

Dec 07 2018

They Can’t Tax What’s Not Earned

  • Dec 7, 2018

With three quarters of a sharply lower corporate tax rate on the books, the median four-quarter trailing profit margin for both the S&P 500 and S&P MidCap 400 jumped to all-time records in the third quarter.

Nov 30 2018

What Can Margins Do For An Encore?

  • Nov 30, 2018

A massive drop in corporate tax payments lifted the third quarter NIPA profit margin back to the 10% level for the first time four years. But while we try not to always view the glass as half empty, we find it troubling that margins remain well-below their 2012 highs (10.6%) in spite of this one-time windfall.

 

May 05 2018

The Gap Is Back!

  • May 5, 2018

We celebrated the official closure of the GDP Output Gap in December, but that milestone was revised away in April by the statisticians at the CBO through a downward adjustment to the estimated rate of “full employment.”

Apr 06 2018

Musings On Margins

  • Apr 6, 2018

Fourth quarter earnings were the last ones to be burdened by a 35% top marginal corporate income tax rate, and therefore seem to have been given a pass by the analyst community.

Feb 07 2018

Multiple Contraction—Just A Little Patience?

  • Feb 7, 2018

Things were bigger when you were a kid. Like that enormous sweatshirt your aunt gave you for your birthday or that hand-me-down ten-speed bike with the cross bar taller than your shoulders.

Dec 07 2017

The “Gap” Is Gone. Now What?

  • Dec 7, 2017

In Q3, the CBO’s Nominal Output Gap swung to positive for the first time since the last business cycle peak. This type of move has historically meant the cyclical peak in profit margins is close at hand.

Sep 08 2017

Sector Margin Checkup

  • Sep 8, 2017

U.S. companies hoping for a reduction in the corporate tax rate are not exactly doing a convincing job of demonstrating “need.”

Jul 08 2017

Recent Years’ Oil Price Experience Akin To 1980s’

  • Jul 8, 2017

We revisit commentary we published in 2015 regarding the late-2014 oil price crash and review why, at that time, we believed oil prices could stay at depressed levels for a longer period than most expected. Additionally, we advise avoiding two Energy sector segments: companies with high balance-sheet risk, and Energy Royalty Trusts.

May 05 2017

How To (Almost) Double Your Money In Under Ten Years

  • May 5, 2017

Buying the S&P 500 on one of the worst possible days in history ultimately yielded a total return of +87.4% (+6.8% annualized) through the end of April 2017...darn, sounds like an advert for Vanguard!

May 05 2017

Sector Profit Margins: A Long-Term Review

  • May 5, 2017

Despite real GDP growth of just 1.6% in 2016, the median S&P 500 company earned a net profit margin of 9.7%, only 40 basis points below the record high established in 2014.

Feb 07 2017

“Trailing” EPS Revisited

  • Feb 7, 2017

The S&P 500 trailing P/E has just climbed above 25x—lower than in March 2009—but incredibly high for any period in which earnings weren’t tainted by recession.

May 06 2016

Valuations: The Correction That Never Was

  • May 6, 2016

The correction failed to meaningfully “reset” any long-term valuation measures, hence, we don’t view the current environment as having much investment merit, but rather, primarily speculative appeal.

May 06 2016

Profit Margins At The Sector Level

  • May 6, 2016

S&P 500 profit margins mask the disparate trends taking place on a sectoral level. We dissect those trends with the ten major sectors grouped by five broad themes: Cyclicals, Commodities, Defensives, Interest Sensitives, and Tech/Telecom.

Apr 07 2016

Margins: Mean-Reversion Works

  • Apr 7, 2016

A late March issue of The Economist proclaimed “profits are too high” and “America needs a giant dose of competition.”  Funny. NIPA Corporate Profits figures released that week show The Economist’s plea for lower profits had already been fulfilled—and not just in the latest quarter.

Apr 07 2016

Implications Of Low Growth, Low Inflation, Low Rates

  • Apr 7, 2016

The current environment will likely persist longer than most expect which will put further downward pressure on profit margins. As margins come under pressure, companies increase leverage to prop up ROE. However, the market wants higher duration, not higher leverage.

Nov 06 2015

To Play The Rally, Or Not To Play?

  • Nov 6, 2015

Question: What will you do if the Major Trend Index returns to its bullish zone?

Nov 06 2015

Margins: Reversion Can Be Mean

  • Nov 6, 2015

In Q2, NIPA’s EBIT margin fell to a new four-year low, over one point below the early 2012 cycle peak.

Oct 07 2015

Earnings: What Is Normal?

  • Oct 7, 2015

Corporate profits are notoriously cyclical, and for decades we’ve sought to temper their swings by using a five-year smoothing of S&P 500 EPS in our valuation work.

Oct 07 2015

Margins Showing Some Cracks

  • Oct 7, 2015

While NIPA profit margins peaked nearly four years ago, median margins across the S&P 1500 (and particularly within the S&P 500) managed to hold up until just the past three quarters. But it now looks as though the long-awaited margin squeeze is finally underway.

Apr 08 2015

Earnings: Less Than Meets The Eye

  • Apr 8, 2015

Amid all the praise heaped on the corporate sector for posting record earnings in the midst of a sluggish global expansion, allow us a respectful vote of dissent. Earnings are abysmal—especially among the S&P 500 companies presumed to be the torch-carriers for this cycle’s profitability rebound.

Apr 08 2015

Profit Margins At The Sector Level

  • Apr 8, 2015

A look at profitability trends at the broad sector level; only Utilities and Telecom Services are experiencing levels below their long-term medians.

Dec 05 2014

Margins: Two Interpretations

  • Dec 5, 2014

Government accounting on everything ranging from the CPI, to the budget deficit, to even the unemployment rate is constantly assailed as being too rosy. So when a government report occasionally paints a less optimistic picture than the consensus one, we’re inclined to sit up and take notice (especially when we agree with it).