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.