Societe Generale
Albert Edwards
However, the bulls and bears remain split about a few things. One big debate is over profit margins and whether or not they are sustainable at such elevated levels.
In his latest note to clients, Societe Generale's Albert Edwards updates us on the bears' position in the debate.
"During the excitement of the downward revision of Q1 US GDP from +0.1% to -1.0% investors seem not to have noticed a $213bn, 10% annualised slump in the US Bureau of Economic Analysis?s (BEA) favoured measure of whole economy profits, defined as profits from current production," writes Edwards, a long time bear himself.
"The bottom line is that the US profits margin cycle has begun to turn down at long last (see chart below)," said Edwards. "It is doing so from elevated but not unprecedented levels ? especially the non- financial part of the economy (my former colleague Leo Doyle always told me I had to add depreciation into the profits numerator as the denominator GDP was also measured gross of depreciation ? i.e. the G in GDP!)."
Albert Edwards, Societe Generale
The downturn in profits and profit margins is striking.
It's worth noting, however, that the experts on the bullish side of the profit margin debate have actually pivoted, and they're now focused more on return on equity (ROE) measures.
"GDP is an imperfect denominator with many parts that vary in size over time," wrote Deutsche Bank's David Bianco in a May 22 note to clients. ""Profits of GDP and net margins are incomplete profit metrics ... Profits should be measured relative to capital employed and both NIPA based ROA and S&P financial statement based ROE measures are consistent with history."
The debate over profit margins is a lengthy one, which we won't get into here (But, read about it here, here, here, and here).
But we can't ignore Edwards' warning. Even the biggest bulls expect some degree of mean reversion (Bianco has predicted that the next 5%+ move in the S&P 500 will be down).
Time will tell who's right.