When Will Corporate Profit Margins Contract?

by: Cullen Roche

There are few signs of impending doom that are more widely cited than record high profit margins and the inevitable mean reversion that always comes following such an environment. It's true. As you can see in the chart below profit margins have averaged about 6.5% over the last 65 years and every time they've gotten well above that 6.5% range they've come back to earth.

(Chart via Orcam Financial Group)

Now, I think there's some validity to the idea that margins are structurally high (see here for details). In other words, 6.5% isn't necessarily a magnet sucking profit margins during contractions. But I think it's safe to say that 10.5% certainly isn't the new normal either.



(Chart via Orcam Financial Group)

So again, it comes down to being able to forecast a recession. I hope your model works.