Corporate profit margins in the U.S. continue to be very high. Will they revert back to the mean? James Montier of GMO has a new piece out on this topic, titled "What Goes Up Must Come Down!" It is worth reading.
There is also a good Reuters piece on this that I linked to earlier this month.
In my experience, when serious, numerate, detail-oriented analysts find something that makes them say, "This doesn't make sense," but runs counter to what people want to hear, they are often ignored. (O.K., that sounds a little petulant, sorry.) I am only seeing a few people really wring their hands over high profit margins -- but they are the smart guys.
Perhaps there is something to the other side here. There may be some reason for corporate profit margins to remain above the long-term level in the medium term. For example, maybe global competition will continue to diminish the bargaining power of labor for the next decade or more. Because businesses are not perfectly competitive with each other, this would tend to raise profit margins, at the expense of compensation to employees.
But such semi-permanent effects seem relatively small; most of the increased margin seems to be from federal spending that is much in excess of tax revenues, as Montier lays out, and very low interest rates, which the Reuters piece mentions. These conditions will return to normal, over time, and cannot be considered permanent or semi-permanent.
