Monday, October 12, 2015



Profit margins reverting to their long-term mean leads to falling earnings growth, is it any wonder that major peaks in profit margins don't just foreshadow major stock market peaks but economic peaks, as well? 

The chart below demonstrates that only in 1985 did the economy avoid entering recession after a 60 basis point decline in profit margins, the degree of decline we have just witnessed.

Clearly, record-high profit margins have been a significant driver of both the economy and the stock market over the past few years. But this, 'most mean-reverting series in finance,' looks to be rolling over and now this powerful tailwind could is shifting into a headwind.

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