GERARD MINACK: The American Manufacturing Renaissance Is Bad News For Stocks

The idea is that rising overseas labor costs and falling domestic energy cost will lead to the reindustrialization of America.

The most obvious benefit of this trend would be domestic job growth.

But beyond that, the consequences are less clear.

"The reindustrialisation of America, if it occurs, will likely be bearish for US equities," writes Gerard Minack, Morgan Stanley's Head of Global Developed Markets. "The biggest medium-term issue for equity investors is whether current high profits can be sustained. One factor boosting margins was the Asian-led surge in global labour supply, which squeezed returns to labour and boosted returns to capital. This was particularly pronounced in America. Reindustrialisation implies that this process has run its course, suggesting that returns to capital will revert to normal over the medium term."

Indeed, with profit margins near all-time highs, more and more analysts warn that they aren't sustainable. And reindustrialization is likely only supports the bearish margin thesis.

Here's more from Minack:

Most see the prospect of America reindustrialising as bullish. In my view, that depends on whether you are an economist or whether you are an investor. The ‘deindustrialisation’ of America was bad for economic growth, but the increased global supply of labour lifted margins and total profits. The effect of wider margins on profits far outweighed the effect of two weak US GDP cycles (the cycles following the 2001 and 2008-09 recessions). Reindustrialisation may reverse this mix: Economic growth may improve, but margins worsen.

Minack notes that profit margin growth has been responsible for half of domestic profits in the past decade. He offers this extremely useful chart.

"Looking ahead, reindustrialisation could contribute to these trends reversing," he reiterates. "On that basis, reindustrialisation would be bearish for equities."