US profit margins are motoring

Profit margins are supposed to revert to the long-term average. In the US, however, they appear to be in a structural upswing.

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Profit margins are supposed to revert to the long-term average. In the US, however, they appear to be in a structural upswing. The chart depicts the overall profit margin of the 500 firms that comprise America's blue-chip S&P 500 index: their total earnings divided by their total sales.

As Epsilon Theory's Ben Hunt points out, $1 of sales produced around 3 cents in earnings a quarter of a century ago. Now a record 11 cents will reach the bottom line.

A key reason for this is an increase in pricing power amid a gradual decline in competition throughout the economy, with several industries now dominated by just a handful of players. Easy money and low interest rates keeping zombie companies alive have also hampered competition.

Viewpoint

Martin Vander Weyer, The Spectator

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