Is this the reason why US profit margins remain so high?
klementoninvesting.substack.com
One of the eternal frustrations of long-term investors with the US stock markets is that the profit margins of US companies seem to have a case of Alzheimer’s: they forget that profit margins are supposed to be mean-reverting. In theory, and in fact for many decades also in practice, profit margins were a main driver for the cyclicality of equity returns. In boom times, companies sell more stuff and can increase prices on their products. This increases their profit margins. Unfortunately, if an industry has persistently high profit margins, it attracts new entrants which increases competition and – eventually – lowers profit margins. Conversely, if an industry has persistently low profit margins, some businesses will exit the industry, either through bankruptcy or changing their business model. The result is less competition between the remaining companies and rising profit margins.
Is this the reason why US profit margins remain so high?
Is this the reason why US profit margins…
Is this the reason why US profit margins remain so high?
One of the eternal frustrations of long-term investors with the US stock markets is that the profit margins of US companies seem to have a case of Alzheimer’s: they forget that profit margins are supposed to be mean-reverting. In theory, and in fact for many decades also in practice, profit margins were a main driver for the cyclicality of equity returns. In boom times, companies sell more stuff and can increase prices on their products. This increases their profit margins. Unfortunately, if an industry has persistently high profit margins, it attracts new entrants which increases competition and – eventually – lowers profit margins. Conversely, if an industry has persistently low profit margins, some businesses will exit the industry, either through bankruptcy or changing their business model. The result is less competition between the remaining companies and rising profit margins.