One of the main reasons the market has recovered so quickly from its lows during the recession is strong corporate earnings. Market bulls argue that earnings growth should continue to propel the market forward. But what is often not discussed is the means by which earnings have recovered: exceptional profit margin expansion. The following graph (part of a Special Report from Comstock describing why they are bearish on the market going forward) illustrates the profit margin for the S&P Industrial Average over the last several decades:
Consider how high profit margins were in 2010! Should we assume they can stay or even rise from these levels? Probably not. Profit margins have been mean-reverting in the past, and there doesn’t appear to be a reason to believe they won’t be in the future. Therefore, unless sales really take off, it seems improbable that earnings can grow at a reasonable clip in the coming couple of years; they may even fall.
(As an aside, consider how quickly profit margins rebounded in this recession as compared to previous recessions! Why?)
