Bridgewater Associates is an investment management firm founded by renowned investor and billionaire, Ray Dalio, back in 1975. Before he launched his own investment fund, Ray Dalio honed his investment acumen at a brokerage company, Shearson Hayden Stone, where he was trading futures. Interestingly, he bought his first stock at the age of 12, hence his interest in the investing world started when he was very young. Bridgewater Associates offers its professional investment management services to its clients, providing several investment strategies. Recently the fund released three research reports – Peak Profit Margins? – A US Perspective (which you can download below), Peak Profit Margins? A Global Perspective (download here), and Geographic Diversification Can Be a Lifesaver (track down here). In its Peak Profit Margins? – A US Perspective Research Report the fund discusses the continuous expansion of US corporate profit margins.
“Over the last two decades, US corporate profit margins have surged and have contributed more than half of the excess return of equities relative to cash. Without that consistent expansion of margins, US equities would be 40% lower than they are today. Margins have been rising for 25 years, and when we look at market pricing, it appears to us that the market is extrapolating further margin gains.
1The long-term valuation of equities hinges heavily on what happens to margins going forward: if margin gains can be extrapolated, then valuations look reasonable; if margins stagnate, then valuations are a bit expensive but not terrible; if margins revert toward historical averages, then equities are highly overvalued.
Over the last few decades, almost every major driver of profit margins has improved. Labor’s bargaining power fell, corporate taxes fell, tariffs fell, globalization increased, technology allowed for greater scale and lower marginal costs, anti-trust enforcement fell, and interest rates fell. These factors have produced the most pro-corporate environment in history. Many of these drivers of high profit margins are now under threat. Before we get to analyzing each, the following panel shows how everything moved in the same direction, in favor of corporates.”
You can download a copy of Bridgewater Associates’s Research Report – Peak Profit Margins? – A US Perspective here: