Tariffs continue to loom large over the markets with the current administration taking the broadest possible view of national security on Friday helping to send share prices down.
But this is not the only weight on the markets. There is worry that we are at “peak margins” in the corporate world, and thus margins will be falling again going forward. The 2017 tax cuts for businesses improved net profit margins significantly. Those gains are permanent, but the earnings per share (EPS) effects have now been baked into share prices. We are at full employment, and as such we have seen a uptick in wage inflation. This begins to eat into the profit margins. Now we are seeing tariffs, which are taxes by another name, and if companies cannot pass this cost on to consumers then there will be another hit to the bottom line. The chart below illustrates the worry. Between Q1 2016 and Q1 2018, all of the sectors of the S&P 500 saw improved profit margins. Over the last year, 9 of the 11 S&P sectors had lower net profit margins in Q1 2019 than one year earlier. We hope that this trend does not continue with Q2.