The corporate margin question usually is framed in the short term. Investors wonder whether margins for the cycle have peaked, thus posing a threat to earnings and the stock market.
In a new note, Morgan Stanley euro equity strategist Graham Secker takes a much broader look at the question, while musing that margins could actually head lower for a decade or longer.
First, he observes that for 40-years the general direction of margins was down, before bottoming in the early 80s.
Photo: Morgan Stanley
He identifies 5 reasons for the 30-year uptrend in margins.
- An incredible period for technological advance.
- Steadily lower interest rates.
- Steadily lower corporate tax rates.
- The rise of outsourcing (which is really lowered CAPEX relative to sales).
- Lower real commodity prices (a trend that was in place for the first 20 of the last 30 years).
Secker offers up all kinds of charts to support each one of those, though they’re all fairly intuitive, and it’s not too hard to make an argument that there’s not much more that can be mined from each one. More outsourcing? Seems doubtful. Nobody thinks interest rates can head much lower. And certainly nobody expects another technological revolution like we saw with computers and the internet since the early 80s.
Granted, you probably could have made this same argument a few years ago, but the bottom line is that long-term trends to change, and after 30-years of gains, it’s probably best to consider the prospect of big structural changes to corporate earnings.