Chart of the Week - Global Profit Margins
One of the most interesting charts on our radar right now...
Chart of the Week - Peak Profit Margins
Global Profit Margin Trends: As I have previously documented, the macro picture remains murky — soft data is tracking at recessionary levels, hard data is fading fast, and the majority of leading indicators are pointing to recession.
The cost crunch of 2022 has put the brakes on profit margins, and weaker macro likely begins to dampen sales in the near term — which will not only put further pressure on corporate earnings, but also dampen margins for those with fixed cost bases or those not able to react quickly enough on the cost control front.
We know by studying history that when profit margins are falling the best case is a period of stagnation and sideways movement for markets, and the worst case is a deeper and drawn-out bear market. The chart below maps this out fairly clearly (with a couple of exceptions e.g. 2008, 2020, 1998 — there were other things going on in those situations!).
But the key point: with profit margins having peaked in early-2022, so far we are running to script in terms of a period of stagnation in global equities. The open question is where do we go from here? And unless we get some miraculous surprise to the upside, it’s most likely the answer is sideways-to-down (at least until the cycle comes full circle!).
Key point: Peak profit-margins portend poor price prospects.
n.b. Check out the full archives of the Chart Of The Week for more charts.
Aside from the Chart Of The Week, this email gives you a brief overview of what was covered in our latest Weekly Insights Report (this email provides a free preview of the Topdown Charts premium service on Substack).
Topics covered in the latest Weekly Insights Report
Aside from the chart above, we looked at several other charts with a focus on global equities and the various moving parts within:
Global Equities: full review of the outlook, balance of risks.
Global vs US Equities: why the long-term cycle is turning.
Value vs Growth: still value in value (vs growth).
Small vs Large: updating small caps outlook after the fall.
Macro Market Update: pulse check on macro and markets.
European Equities: a remarkable and surprising new high for Europe.
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Callum Thomas
Head of Research and Founder at Topdown Charts
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