pay close attention in the upcoming earnings season to corporations’ profit margins that’s because the next bull market—whenever it begins—will be heavily dependent on those margins remaining not only at their current wellaboveaverage level but expanding even further the accompanying chart provides the historical context as you can see profit margins have been rising for many years and hit a record in the second quarter of 2021 even though they currently are only modestly below their mid2021 record their decline over the last year and a half has been accompanied by a bear market on wall street that is not a coincidence even if profit margins don’t decline further from current levels it will be difficult for a bull market to gain much traction if profit margins stay constant for example and there’s no change to the market’s pe ratio the stock market’s future return will be a function of revenue growth and that in turn is dependent on economic growth that’s a sobering prospect the nonpartisan congressional budget office is projecting that nominal us gdp will grow at a 46 annualized rate over the next decade to translate that gdp growth rate into a projection for corporate revenue growth we must subtract an estimate of the portion of gdp growth that does not come from publicly traded corporations—such as entrepreneurial startups private equity venture capital and so forth following research from robert arnott founder and chairman of research affiliates i subtract 09 of an annualized percentage point after also subtracting the cbo’s projection of cpi inflation over the next decade we arrive at a projected real return of less than 1 annualized from now through 2032 in other words given these assumptions the stock market over the next decade will barely keep up with inflation note that this modest projected return assumes margins stay constant and that assumption may itself be too optimistic according to morgan stanley’s global investment committee they point out that corporate profit margins tend to be mean reverting which implies that wellaboveaverage levels—like the current one—are more likely to decline than rise furthermore the committee points out the probability of a profit margin decline exists even if the economy can avoid a recession if a recession were to occur then margins would contract even more is there any way for the bulls to wriggle out from underneath the bearish implications of this analysis absent expanding profit margins the only way would be for the market’s overall pe ratio to widen and that seems a risky bet the sp 500’s spx current trailing 12month pe ratio is already 33 higher than its longterm average the shiller pe ratio which adjusts for cyclical variations is currently 61 above its longterm average the bottom line the stock market has grown dependent on corporations being able to get more and more bang out of each buck of revenue this trend can’t last forever however and when the trend turns it will be bad news for the stock market’s longerterm prospects as morgan stanley’s global investment committee observes “in a world of constant news flow… it is easy to get myopic and complacent there could be too much focus on… estimates about the future based on the recent past losing the historical context of the present we fear that current market pricing based on recent profit margins reflects such shortsightedness” mark hulbert is a regular contributor to marketwatch his hulbert ratings tracks investment newsletters that pay a flat fee to be audited he can be reached at markhulbertratingscom