With input prices rising, everyone’s worried that profit margins will get compressed, and the stock market will get hammered.
But stock market pessimists shouldn’t bank on this.
As Citi’s Tobias Levkovitch points out in a note, history shows that when margins rise, PE multiples fall, and when margins fall, multiples rise. The only exception to this, as the chart below shows, was the internet bubble. So yes, maybe margins will come down, but history suggests PE multiples will expand to compensate.