US profit margins deteriorated but loose financial conditions support equities

This article is an update of last year’s Core Matters “How do assets perform in a maturing business cycle” following the significant downward revision of US pre-tax corporate profit data since Q2 2016 (on average by -6% and -11% in Q1 2019). Consequently, our Profit Margin indicator suggests that we have entered into a Margin Recession since Q4 2018.

Highlights:

  • This article is an update of last year’s Core Matters “How do assets perform in a maturing business cycle” following the significant downward revision of US pre-tax corporate profit data since Q2 2016 (on average by -6% and -11% in Q1 2019).
  • Consequently, our Profit Margin indicator suggests that we have entered into a Margin Recession since Q4 2018.
  • Second, our US Recession indicator, based on broader economic variables, shows only a 35% chance of a recession, as highlighted in the Focal point “Recession risks are limited, but policy responses too”.
  • Third, current low nominal and real US 10Y yields have been associated in the past with positive quarterly relative returns of equities over bonds not only on average, but also during drawdowns.
  • Overall, we have to be careful about the evolution of corporate profits, but given the very loose financial conditions we are still constructive on equities.

Read the full publication below.

US PROFIT MARGINS DETERIORATED BUT LOOSE FINANCIAL CONDITIONS SUPPORT EQUITIES

RELATED INSIGHTS

EQUITIES: POSITIVE RETURNS AHEAD DESPITE CHALLENGES
Equity markets have rebounded from a historical slump in Q1, with US markets even posting fresh record highs. We acknowledge the risen risks of setbacks amid loftier valuations, elevated political risks (US elections, Brexit and US-China frictions) and Covid uncertainties into autumn.
TAKING MONETARY POLICY TO YET ANOTHER LEVEL
The presentation of the new Long Term goal and strategy on August 27 marks a deep shift in the Fed’s monetary policy. The new way inflation and the labour market will affect monetary policy will result in a marked downward bias to interest rates.