Displaying items by tag: margins
There is a big new risk to stocks to worry about, says Goldman Sachs. Actually, it is a not a new risk, it is an old one that investors have not been thinking about. The risk? Pay. The bank says that rising pay pressure from workers could hurt companies at all levels and eat into margins. The labor market is incredibly tight, which puts upward pressure on pay and downward pressure on corporate margins. Wage growth is already at its highest rate since 2007, and companies may feel the sting. According to Goldman, “While S&P 500 profit margins are at historical highs, survey data indicates a record level of corporate concern regarding labor costs”.
FINSUM: Many analysts have been predicting an earnings recession and this is one of the factors that could exacerbate it.
The FANGs have gotten a lot of market pressure lately, both in the form of sell-offs, but also from analysts, who say tech companies will be among the worst hit by tariffs. However, one fund, Light Street Capital, which has made great returns betting on new technology companies, thinks Netflix has a lot of room to run. They reason they like Netflix is that the company has intentionally made its product very cheap in order to grow its subscriber base. They think there is a lot of room for Netflix to raise prices without alienating customers. Consumers have gotten used to paying $100 a month for cable, but are currently only paying $9-$12 per month for Netflix.
FINSUM: Netflix has a lot of room to expand margins. Think about the effect to earnings if it raised prices to a still very tolerable $14.99 per month.
2019 is often to an uneven start. We have had some good days and some bad ones, but the market has surely not found solid footing or a narrative to drive it. With that in mind, the question of allocation becomes eve more complicated than it was a few months ago. Goldman Sachs has just put out its recommendations and argues that investors should put money back in shares, as they are due for a big rebound. Historically, shares generally bounce back after falling 20% in a quarter, and Goldman thinks there are big returns to be made. Companies seeing margin expansion might be particularly favorable.
FINSUM: The S&P 500 has already advanced almost 10% since Christmas eve, but we are not sold the current tread is upward.
Retail is in midst of its biggest selloff since the Financial Crisis. Stocks in the sector have not fallen this hard, this fast, since 2008, and that includes the 2017 panic in retail. Retail stocks had been swept up in a sort of cautious optimism this year that had allowed them to see gains. However, they have gotten caught on the wrong side of fears over the economy and trade war, falling a whopping 17% this quarter alone. The big tumble comes despite a quite bullish Christmas sales forecast.
FINSUM: Retail has a lot of problems facing it right now. Outside of the well-known threat of ecommerce, there is also rising labor costs which are pinching margins at the same time as revenue is getting tighter.
One of the pillars of this nearly decade-long bull market has been the growing profits of US corporations. US stocks have seen their profit margins rise steadily since 2009 and are around a record mark of 10%. Analysts continue to forecast growth to around 12% in 2020. At the beginning of the 1990s, margins were just half of now. However, this narrative is fraught as just 10 stocks account for around 50% of all the margin growth in the S&P 500 since 2009. Those stocks? All tech, unsurprisingly. But what it means is that many other companies are not as healthy as many assumed, and as we enter a tougher era for margins, including higher labor costs, increased input costs, and higher interest costs, there could be some steep falls.
FINSUM: We think this is a reason to worry, as when margins really start to fall on the back of higher rates and costs, investors are going to be very alarmed.