S&P Dow Jones Indices data indicates that the S&P 500 operating profit margin for the first quarter of 2024 stood at 11.76%, with the trailing four-quarter margin at 11.44%, surpassing figures from 2023 and 2022.
The Risks of Elevated Profit Margins for Stocks
Corporate profit margins, while currently high, can’t endlessly rise, potentially signaling trouble for the stock market.
These numbers reflect a return of profit margins to their long-term trendline after fluctuations associated with the Covid-19 economic disruption and subsequent stimulus measures.
Analysts project further margin growth, with estimates suggesting margins above 12% for 2024. This expansion is critical for the stock market‘s current valuation; if margins were at 1990s levels, the S&P 500 would trade significantly lower.
Economists question the sustainability of margin growth, especially considering the decline in labor’s share of income over the past three decades.
While some anticipate continued margin expansion, others, like Rob Arnott of Research Affiliates, foresee a return to historical norms. Such a shift could dampen future market returns.
Even if margins stabilize, prospects for robust market performance are limited. With high P/E ratios and sluggish sales growth, investors face the prospect of below-average returns over the next decade, particularly if economic growth continues to decelerate.
