The Two Reasons Corporations Should Be Worried About Profit Margins In 2014

Investor Byron Wien says his #1 concern for 2014 is that corporate profit margins may be rolling over.

Byron Wien is right to worry that record high corporate profit margins can’t last.

Here are two reasons why.

One is that worker wage growth is on the rise.

After trending down for the past several years, the year-over-year rate of growth in average hourly earnings growth is on the rise. And this is likely to continue as the jobs market gets tighter. Higher wages for workers equals lower profits for corporations.

Another reason to worry has to do with the composition of corporate profits.

This chart from Cullen Roche uses the famous Kalecki equation, which shows where corporate profits come from. Corporate profits are affected by personal savings (which is a drag), foreign trade, and government deficits.

With government deficits expected to decline, and the foreign sector expected to be mediocre (don’t expect a huge year for emerging markets) it’s going to be a tough year for corporate profits, even if the economy does much better.

So higher wages, lower government deficits, and weaker foreign trade could conspire to put stress on corporate profits in 2014.

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