Profit margins for S&P 500 companies are near all-time highs. And experts agree that these margins are likely to pull back a bit, especially if demand shrinks and the economy goes into recession.
However, profit margin bulls argue it’s a mistake to think that margins will revert to a long-term mean. Rather, they argue that profit margins are in a structural upswing.
In other words, any argument for complete mean reversion should imply that companies will also scale back their overseas footprint and leverage up their balance sheets.
In his 2014 Outlook note, Deutsche Bank’s David Bianco included these two slides showing the long-term changes in the S&P 500 and its companies that have caused profit margins to make a structural move higher.