Bridgewater Associates estimates U.S. equities would be 40% lower than where they are today without the consistent expansion of profit margins.
Why it matters: The world's largest hedge fund is warning that corporations' high profit margins are peaking, posing a risk to the stock market's rally.
Several factors have contributed to companies' fatter bottom lines over the last 20 years: corporate tax cuts, the rise of globalization, less anti-trust enforcement, low interest rates and workers' shrinking bargaining power for more pay.
But "many of these drivers of high profit margins are now under threat," Bridgewater analysts say in a new white paper, and the "long-term valuation of equities hinges heavily on what happens to margins going forward."
Of note: Without the benefit companies got from the tax cut last year, and with higher material and labor costs, analysts expect shrinking profit margins as companies release first quarter earnings.
Still, as of yesterday's close, the S&P 500 is just 31 points from the record high set late last year.