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Stepan Lavrouk
Stepan Lavrouk
Articles (126) 

Bridgewater: US Profit Margins May Have Peaked

Ray Dalio's hedge fund sees stock prices going lower

April 17, 2019

Ray Dalio (Trades, Portfolio) is a flexible thinker. He has been able to make money on both the long and short side of the market, so it should come as no surprise his hedge fund is also comfortable forecasting a bear market. Earlier today, Bridgewater released a report warning investors of peaking U.S. corporate margins and forecasting lower stock prices. This is a theme that has been echoed by Morgan Stanley’s Chief Investment Officer Mike Wilson, whose reports we have looked at in the past.

Margins cannot keep expanding forever

The core argument made in the report boils down to the following: The last two decades have been extraordinarily good for U.S. corporations, with almost every driver of profit margins improving.

“Over the last two decades, U.S. corporate profit margins have surged and have contributed more than half of the excess return on equities relative to cash...without that consistent expansion of margins, U.S. equities would be 40% lower than they are today.”

Bridgewater notes the regulatory shifts that have taken place in that time have overwhelmingly benefited large corporations:

“Labor’s bargaining power fell, corporate taxes fell, tariffs fell, globalization increased, technology allowed for greater scale and lower marginal costs, antitrust enforcement fell and interest rates fell. These factors have produced the most pro-corporate environment in history. Many of these drivers of high profit margins are now under threat.”

In particular, the dominance enjoyed by the United States since the end of the Cold War certainly played a major role in the expansion of corporate margins domestically. The integration of the ex-U.S.S.R. bloc into global capital markets and the emergence of China as a viable source of cheap labor both contributed significantly to this phenomenon. Now, the once-unipolar world is fragmenting once again into competing spheres of influence, with both Russia and China adopting decidedly more confrontational stances with regard to the U.S. and its European allies.

Domestically, voters are becoming increasingly skeptical on the issues of free trade and globalization. On both the left and the right, populist rhetoric is directed against widening wealth gaps and what some people see as the privileged status held by large multinationals. As the report notes:

“We are in the midst of a populist backlash against rising inequality and increasingly seeing a move toward more protectionism...Recent surveys show increasingly animosity towards globalization and the power of companies more broadly and a bit more welcoming attitudes toward government regulation of firms.”

In other words, the good times cannot continue indefinitely for corporates - at a certain point, the pendulum will begin to swing back.

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About the author:

Stepan Lavrouk
Stepan Lavrouk is a financial writer with a background in equity research and macro trading. Specific investing interests include energy, fundamental geoeconomic analysis and biotechnology. He holds a bachelor of science degree from Trinity College Dublin.

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