Blackstone vice chairman Byron Wien said in August that he was worried about the second half of 2013.
The veteran investment strategist is one of the most prominent proponents on Wall Street of the view that corporate profit margins are peaking, a phenomenon he believes will begin eating into earnings growth and become a negative catalyst for stock prices.
In January, Wien predicted that “a profit margin squeeze and limited revenue growth cause 2013 earnings for the Standard & Poor’s 500 to decline below $US100, disappointing investors” and causing the index to trade below 1300.
That obviously hasn’t happened yet, but Wien thinks it could begin next week when the third-quarter earnings reporting season gets underway.
In his October market commentary, Wien writes:
The absence of bad news has caused investors to become optimistic. Looking at the sentiment data and reports of institutional investor polls in the United States and Europe, it is clear there is a widespread view that the world economy is improving and stocks are headed higher. This makes the market vulnerable to a shock of some kind. I have reflected on where that could come from and continue to believe earnings in the U.S. will be disappointing.
Profit margins are at a high and rising interest rates and other cost pressures should begin to show up in the third quarter reports. More than three-quarters of the companies providing guidance to analysts are encouraging them to adjust their estimates lower. Revenues so far this year have been disappointing, and that should provide a clue to possible earnings weakness as the year develops. Whether this will be enough to send the market lower remains unclear.
The yield on the 10-year U.S. Treasury note hit a multi-year high of 3.0% in early September, marking a 1.37% percentage-point rise in long-term interest rates since early May. The 10-year yield has since backed down to current levels around 2.65%, but remains significantly elevated from levels in the first half of 2013.
Wien and other adherents to the view that profit margins have peaked will finally get to test their thesis next week.