Salient to Investors:
Jeremy Grantham at GMO said high profit margins are not connected to reality and an aberration, propped up by a great surge in government spending that fueled consumption, and will send stock markets tumbling when they eventually revert to their mean. Grantham said lower margins are the great threat to market performance, and as political pressures force the US to cut its budget deficit, the economy will suffer and margins will drop.
Ben Inker at GMO said earnings are unsustainably high. GMO sees fair value of the S&P 500 at between 950 and 1,000 and expects US large-caps to return 1.8 percent a year above inflation over the next 7 years.
Bob Doll at BlackRock said low labor costs and cost-saving technology show no sign of reversing and will allow companies to maintain their profitability, so they do not have to fall. Doll said with job growth likely to remain sluggish and low interest rates, rising costs are no threat to profits – we did not need a strong economy to get margins high, so we do not need a strong one to keep them high.
Moody’s Analytics said margins at non-financial US companies reached 15 percent in Q3, the highest level since 1969 and versus 8.7 percent when the recession ended in Q2, 2009. Wages and salaries as a share of national income fell to 49.4 percent in Q3, the lowest since the government began collecting the numbers in 1948.
Mark Zandi at Moody’s said businesses have done a marvelous job of reducing costs, and the globalization of the workforce and a US jobless rate of 9 percent have given management the upper hand.
William Stromberg at T. Rowe Price said American multinationals are now much less dependent on developed-market economies.
Chris Christopher at IHS Global Insight said profit margins have been trending higher since the mid 1980s. Moody’s said quarterly margins peaked at 11.9 percent in the 1980s, 13.6 percent in the 1990s and 14.5 percent in 2000s.
The S&P 500 returned an annual 20 percent over 5 years after margins peaked in Q2, 1984; fell an annual 1.6 percent over 5 years after margins hit a high in Q3, 1997, and declined 1.2 percent a year after margins peaked in Q3, 2006.
Dennis Bryan at the FPA Capital Fund said firms may be reaching their limit in wringing out costs, after two years of rising margins, and in cutting millions more Americans out of the workforce. Bryan expects much profit disappointment, saying sales growth may slow as economies around the world lose steam – when margins peaked in the past, they typically fell over the following 5 years.
Allen Sinai at Decision Economics said high margins are here to stay – things like cloud computing is the latest tool to keep costs in check.
The average analyst expects sales growth for S&P 500 companies to climb 3.9 percent in 2012 and 11 percent in 2011.
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