You may not appreciate this threat. It’s easy to focus instead on the continued and surprising strength of economic demand, which has translated into a robust growth rate of corporate sales over the last year. But a seemingly modest decline in profit margins can transform strong sales growth into flat or even declining earnings.
Yet the market over the long term would struggle even if the S&P 500’s profit margin were to remain at its currently still-elevated level. With a constant margin, future stock market growth can come from just two sources: revenue growth and/or P/E expansion. Marginal outlook The prospect of a static S&P 500 profit margin in coming years is sobering enough. But, unfortunately margins are likely to face downward pressure in coming years, according to a report from two analysts at Ned Davis Research: Ed Clissold and Thanh Nguyen .
High inflation could prove to be short-lived this time around, of course. But, in another recent report, Clissold and Nguyen point out that low inflation could also squeeze profit margins over the short term: “For much of the [coronavirus] pandemic, inflation has been rising faster than wages, meaning that in aggregate companies have been able to pass higher costs to customers.
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