|Standardized Corporate Profits After Tax divided by GDP|
The main argument for profit margin mean-reversion is that high margins invite new competition while low margins discourage new entrants. Profit margins are also important to investors because steep reductions in profit margins tend to be coincident with steep drops in corporate profits.
|Standardized Corporate Profits After Tax divided by GDP and Corporate Taxes as a % of Prior Peak|
Could it actually be the that maybe underlying margins on goods and services are not THAT high? Below you'll see a now similar chart which includes pre-tax corporate profits. As you can see, while pre-tax margins are elevated, they are much less alarming at +1.33 standard deviations and the rest is the effect of a near record low tax rate of 18.6%.
(Note: above charts are quarterly and the one below is yearly since tax receipts are only available on a yearly basis.)
|Standardized Corporate Profits as % of GDP Before and After Tax|
With interest rates still falling and a multi-year liability repricing cycle, there is little immediate danger from a bottom in rates. Additionally, a fixed investment and/or employment boom which drove the cost of labor upwards would mean increases in final demand and GDP, leading to shrinking margins coupled with growing top-lines, not exactly a disaster.
Unless you see a recession in our very near future, it seems there's simply nothing to see here.