Credit Suisse: Corporate Profit Margins Will Not Decline
Here’s a contrarian view for you on the corporate profit mean reversion front. Credit Suisse says profit margins are likely to stay high due to two primary factors – an accommodative Fed and a weak labor class:
- Net income margins are unlikely to fall significantly until rates rise
50% of the improvement in margins has come from lower interest charges. We believe that the interest charge will not rise unless rates go up. Indeed, looking at the relationship between the corporate bond yield and the interest charge suggests that, if anything, the interest charge will fall.
- Typically, margins do not fall materially unless labour has pricing power
Historically, profit margins do not fall until the wage share of GDP rises, with the typical lag
of 21 months from the trough in wage growth until the peak in margins.
Source: Credit Suisse
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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4 Comments
What if the bubble in corporate HY bonds goes pop? Rates for sub blue-chip corporations should rise, even if Treasury rates continue to go lower.
http://www.youtube.com/watch?v=7RHj15wVXec
Duck & Cover!
Kalecki equation would suggest that falling Govt deficits will find their way into lower corporate profits so there will be a drag of some type.
which also means that corporate profit margins do not have any room to improve either.
Interest rates can not go lower (not by much). If the margin is supposed to improve by falling labor cost due to loss of pricing power of labor, then that signifies further decline in the economic situation, which will result in lower revenue and contribute to the drag in margins.