Corporate Margin Widening: Are We Slowing Down?

July 31, 2013 10:38 by Clayton Reeves in Capital Markets, Economy  //  Tags: , , , ,   //   Comments (0)

According to the Wall Street Journal, we may be approaching a period of slowing corporate growth.  The non-financial portion of the S&P 500 are expected to increase revenues by just 1.1% in the second quarter, year on year, according to Thomson Reuters.  Earnings are expected to decline 0.6% over that same period.  This would be a sign that margin widening may be at it's end.  After all, if there is no material growth to build on, cost cuts and efficiency gains can only take a company so far. Howard Silverblatt, senior index analyst for Standard & Poor's, agrees with that conclusion, saying "I don't know how many more people you can get rid of. You cannot continuously cut to get your way out."

Four out of the last five quarters, corporate revenues have grown slower than the U.S. GDP.  This is not a figure that can continue indefinitely.  According to David Bianco, chief U.S. equity strategist at Deutsche Bank, "Earnings are going to run out of growth steam unless we get a pick up in business spending."  Meanwhile, companies are hesitant to spend too much money in the face of weak growth and uncertainty around political issues that impact corporate expenses such as health care reform.  It is a bit of a catch-22 that no one has felt confident enough to muscle their way out of, and with growth in margins slowing, it may not happen anytime in the immediate future.

Click here to read the WSJ article.

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