The Most Controversial Chart In The Stock Market – Business Insider

The Most Controversial Chart In The Stock Market – Business Insider

The stock market is at an all-time high.

And gains have been bolstered by earnings, which in turn have benefited from historically high corporate profit margins.

These expanding margins have allowed flat to modest revenue growth translate to relatively strong earnings growth in a phenomenon formally known as operating leverage.

The bears believe these margins are doomed to fall back to a long-term mean. They argue that weaker demand and rising rates among other things will cause sharp margin contraction.

The bulls believe that margins are undergoing a structural change. Increased overseas exposure, balance sheet deleveraging, and technological improvements have margins in a long-term upswing.

This latter argument is supported by industry analysts via their bottom-up consensus forecasts.

As you can see in this chart from Goldman Sachs, Wall Street’s stock pickers only expect profit margins to move higher.

For what it’s worth, Goldman expects higher labor costs and decelerating IT margins to act as headwinds to margin growth. Still, they see the S&P 500 rising to 1,900 by the end of 2014, to 2,100 by the end of 2015, and to 2,200 by the end of 2016.

Goldman Sachs

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The Most Controversial Chart In The Stock Market – Business Insider

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