US profit margins deteriorated but loose financial conditions support equities

This article is an update of last year’s Core Matters “How do assets perform in a maturing business cycle” following the significant downward revision of US pre-tax corporate profit data since Q2 2016 (on average by -6% and -11% in Q1 2019). Consequently, our Profit Margin indicator suggests that we have entered into a Margin Recession since Q4 2018.

Highlights:

  • This article is an update of last year’s Core Matters “How do assets perform in a maturing business cycle” following the significant downward revision of US pre-tax corporate profit data since Q2 2016 (on average by -6% and -11% in Q1 2019).
  • Consequently, our Profit Margin indicator suggests that we have entered into a Margin Recession since Q4 2018.
  • Second, our US Recession indicator, based on broader economic variables, shows only a 35% chance of a recession, as highlighted in the Focal point “Recession risks are limited, but policy responses too”.
  • Third, current low nominal and real US 10Y yields have been associated in the past with positive quarterly relative returns of equities over bonds not only on average, but also during drawdowns.
  • Overall, we have to be careful about the evolution of corporate profits, but given the very loose financial conditions we are still constructive on equities.

Read the full publication below.

US PROFIT MARGINS DETERIORATED BUT LOOSE FINANCIAL CONDITIONS SUPPORT EQUITIES

RELATED INSIGHTS

CHINA’S RECOVERY CONTINUED BUT A BIT SOFTER THAN EXPECTED
China's economic recovery continued in Q3 2020, although a bit softer than expected. Real GDP growth rose to 4.9% yoy, slightly below the Reuters consensus expectation of 5.2% yoy, but still a substantial upturn from the 3.2% yoy in Q2. On a quarterly base, growth dynamics softened to 2.7% qoq, after 11.7% qoq and -10% qoq in the two previous quarters.
Citywire video-interview with Peter Marber
Watch Peter Marber, fund manager of this global, non-directional, long/short approach to Emerging Markets debt, in a video-interview by Citywire.
COVID-19 FACTS & FIGURES
According to the IMF’s Managing Director, strong international cooperation on coronavirus vaccine could speed up the world economic recovery and add $9 trillion to global income by 2025. A WHO trial found that Remdesivir, Hydroxychloroquine, Lopinavir and Interferon have little or no effect on hospitalized Covid-19 patients. Gilead Sciences has questioned the findings of the WHO study saying data appeared inconsistent.