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
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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