The Curious Incident of the Elevated Profit Margins

GMO

James Montier

Research

10 Pages

GMO investigates why United States corporate profit margins have stayed unusually elevated for more than a decade. James Montier revisits his earlier mean reversion call and uses the Kalecki profits equation to unpack the macro drivers of profitability. He then connects these drivers to equity valuations, long run return prospects and relative opportunities outside the United States.

Date published: May 2023

Key Takeaways

Kalecki framework used: Profits are linked to net investment, dividends, household savings, government savings and foreign savings at the macro level.
Fiscal deficits central: Elevated margins reflect fiscal deficits around twice their postwar average, more than shifts in investment or savings.
Valuation implications: Even assuming persistently high margins, United States equities appear expensive while value opportunities abroad look more attractive.
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