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Tags: Stagnant | profit | margins | stocks

Hulbert: Stagnant Profit Margins Will Restrain Stocks

By    |   Tuesday, 04 August 2015 07:00 AM EDT

The S&P 500 index has more than tripled since March 2009, but double-digit annual percentage gains are unlikely to continue, says MarketWatch columnist Mark Hulbert.

And why is that? "The stock market must jump over a very high hurdle if it’s to live up to historical averages in coming years," he writes. "Sky-high corporate profit margins will have to expand even further."

Without an increase in profit margins, "future earnings can grow no faster than sales, and sales growth is tied to an economy that is unable to produce growth in excess of 2 percent annually," he argues.

Assuming a dividend yield of 2 percent, Hulbert calculates an annualized real return of 3.5 percent for the stock market over the next 10 years.

Rising profit margins could push that number higher. But the three factors credited for boosting margins in recent years are unlikely to continue, Hulbert says. Those are "falling interest rates, lower corporate tax rates and a declining share of GDP going to worker compensation."

Meanwhile, with so many financial markets standing at elevated levels, plenty of investment experts are worried there's a bubble brewing that will burst violently. Barry Sternlicht, the renowned CEO of Starwood Capital Group is one of them.

"People [investors] are nervous, sitting at their machines ready to hit the sell button," he told CNBC.

Many experts see a bubble in the venture-capital market, where 105 start-up companies are valued at more than $1 billion, according to The Wall Street Journal.

Stock-market valuations are an issue too. Robert Shiller's cyclically-adjusted price-earnings ratio, which accounts for 10 years of earnings, stands at 26.7 for the S&P 500 index. For months the gauge has hovered at its highest level except for the pre-crash periods of 1929, 2000 and 2007.

The S&P 500 stood less than 2 percent below its record high Monday morning.

Meanwhile, "there's no liquidity in markets across the board," Sternlicht said. And the markets will face a day of reckoning, with some event triggering a decline, he said. "Something will freak people out."

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StreetTalk
The S P 500 index has more than tripled since March 2009, but double-digit annual percentage gains are unlikely to continue, says MarketWatch columnist Mark Hulbert.
Stagnant, profit, margins, stocks
342
2015-00-04
Tuesday, 04 August 2015 07:00 AM
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