Corporate profit margins are right at record highs.
Coming out of the financial crisis, fattening profit margins have helped corporate profits surge despite lackluster revenue growth.
“Firms have enjoyed a secular increase in the productivity of labour and capital as well as technological innovations such as real-time inventory management, reducing both fixed and variable costs,” said Goldman Sachs’ Amanda Sneider in a new research note. “Low inflation in terms of commodity inputs and labour costs have been tailwinds. Taxes and interest rates have never been more favourable for the profitability of firms.”
“Looking forward, the forces that influence margins are equally balanced between upside and downside,” said Sneider. “We forecast trailing four quarter net margins will remain at peak levels in 2014 before rising to a new peak of 9.0% in 2015.”
For some historical context, Sneider offered this chart showing how each expense component contributed to widening margins.
“Rather than one major factor pushing margins to record levels, over the last 20 years almost every component of the income statement has shrunk relative to sales,” she noted.
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