Corporate profit margins are near their all-time highs.
Stock market bears believe that margins will inevitably contract, crushing profits and ultimately bringing down stocks.
However, UBS’s Jonathan Golub is convinced any mean reversion in margins won’t happen any time soon.
“Our work shows that rising capacity utilization is positively correlated with higher operating margins,” wrote Golub in a new note to clients. “Based on historical patterns we believe each has further upside potential.”
In the near-term, Golub thinks that companies will benefit more from cost cuts rather than sales leveraging up profits.
Despite the historically tight relationship between operating margins and capacity utilization, we believe the recent margin pick-up has largely been driven by companies managing their costs rather than benefiting from operating leverage. As seen in the chart below, SG&A as a per cent of sales has continued to fall while interest and other cost line items have remained fairly constant. We don’t currently see any indication of a slowing of this trend.