What’s Holding Up Record Margins?

Profit margins have historically been cyclical, but the recent performance of S&P 500 companies has many investors questioning whether this rule still stands. Structural changes in the composition of the index, and the higher margin profile that results from that change, suggest that a higher baseline margin is justified. However, we argue that some portions of current and future profit margins are either cyclical or temporary, yet are being capitalized as permanent in current analyst forecasts. Here, we analyze the historical trajectory of S&P 500 margins, estimate how much of the recent margin expansion is structural vs. cyclical/temporary, and provide tangible examples with industry case studies.