Margins

Hussman has a very interesting chart showing margins and subsquent 5 year earnings growth. Usually the higher the margins the lower the subsequent growth in earnings.

The most recent data show however that earnings have kept growing though margins were already very high. Buttonwood tries to explain why. Normally high margins and profits attract investments and competition and hence lower margins and profits. But currently investment is still low enabling companies to continue to earn unusually high profits. Hence the record high margins.

Here is a chart showing gross domestic investment and gdp indexed to 100 in December 2007. Investment has not yet recovered but it is catching up.


Beware the margin reversal.