Have corporate profit margins reached a permanently high plateau…doubtful
James Montier of Dresdner Kleinwort has another great article out.
In it, he takes Jeremy Siegel to task for his recent assertion that profit margins will not revert to the mean (go back to their average level of the past or below) and will stay at their current, record highs.
Jeremy Siegel is famous for being a professor at the esteemed University of Pennsylvania Wharton School of Business as well as being the well known author of Stocks for the Long Run.
Siegel’s argument is that U.S. based firms are deriving much more of their profits from fast-growing, overseas economies and that including private firms’ profits with public firms’ profits reduces the profit margins close to average.
Both of these arguments are suspect in Montier (and my) opinion.
As Jeremy Grantham puts it, if profit margins don’t mean revert (go back to average), then capitalism is broken. Competition will always drive aggregate profit margins down over time. This is an iron law of free market economics.
As for private plus public firms’ profit margins, the current margin of profits to Gross Domestic Product are at a 45 year high of 20%, far above the 16% average. Perhaps Siegel is looking at different numbers than Montier is.
Added to this, market history is littered with brilliant people who believe “it’s different this time.” As John Templeton put it, those are the four most dangerous words in investing.
A brilliant economist named Irving Fisher is famous for having said that stocks had hit a permanently high plateau in 1929. Unfortunately for Fisher’s reputation, the stock market proceeded to crash by over 90% over the following 3 years. Perhaps Siegel is hoping to supplant Fisher…
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