CHART OF THE DAY: The Outlook For Profit Margins Is Outrageous

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One of the most controversial stories of the economic recovery has been the historically high corporate profit margins.

High and rising profit margins have caused corporate profits to surge even as GDP inched only modestly higher.  And these expanding margins are largely attributable to companies freezing hiring or cutting their workforces.  This explains why unemployment has remained persistently high.

So, have profit margins topped out?

Analysts don’t think so.  In fact, analysts expect margins to continue to climb through at least 2014.

Here’s some commentary from Goldman Sachs’ David Kostin, who expects margins to level off:

Bottom-up consensus currently forecasts net margins will rise to 9.3%. In contrast, our top-down forecast suggests margins will remain in the narrow band of 8.7%-8.9% where they have hovered for the past two years. However, with 51% of the companies in the S&P 500 having reported 4Q 2012 results, margins appear to have slipped on a trailing four-quarter basis to 8.5%.

earnings are far more sensitive to changes in margins than GDP or sales growth. A 50 bp shift in margins equals $5 per share. Our current EPS forecast of $107 and $114 for 2013 and 2014, respectively, represents annual growth of about 10% and 7% and assumes trailing four- quarter margins creep from 8.5% in 2012 to 8.9% in 2013 and 9.0% in 2014.

Here’s a chart of the forecasted margin trajectories.

Chart of the day profit

Photo: Goldman Sachs

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