Obsessing Over Profit Margins Is Good Way to Miss S&P 500 Gains
Comment of the Day

June 17 2015

Commentary by David Fuller

Obsessing Over Profit Margins Is Good Way to Miss S&P 500 Gains

Falling profit margins provide little reason for concern that a six-year bull market in U.S. stocks is about to end, according to Pierre Lapointe, Pavilion Global Markets Ltd.’s head of global strategy and research.

The attached chart shows how margins for all U.S. companies, as compiled quarterly by the Commerce Department, compare with the performance of the Standard & Poor’s 500 Index during the past 65 years.

Corporate profits amounted to 11.4 percent of gross domestic product in this year’s first quarter, below a peak of 12.7 percent in the third quarter of 2013. The earlier reading was the highest since 1950.

“It can take a long time before contracting margins begin to hurt stock prices,” Lapointe and colleagues Alex Bellefleur and Francois Boutin-Dufresne wrote in a report yesterday. They cited the 1982-1987 bull market, which took place even though earnings as a percentage of GDP were among the lowest since World War II.

David Fuller's view

The opening graph in David Wilson’s article will certainly be of interest to most investors.  It also confirms what this service often talks about: stock markets like the extremely low interest rates created by QE.  Additionally, stock markets respond well to a loosening of previously high interest rates and tight monetary conditions.  Both are stimulative measures.      

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