FORTUNE -- Over the past year or so, corporate profits have been a growing concern for investors. They're too good.
Margins, the percentage of each sale that ends up as profit, as measured by GDP, have never been this high. They hit a record near the beginning of 2011 and have continued to march up. At the end of June, corporate profit margins were 11.5%. That's two percentage points higher than the roughly 9.5% they peaked at in 2006.
As a result, the general conclusion is there is nowhere for profit margins to go but down. That's bad news at a time when the economy is growing so slowly. Even if the economy continues to improve, companies, after years of cost-cutting -- a main reason why margins are so high -- will have to hire. Actual profits are sure to fall.
But strategist and economist Ed Yardeni thinks profit margins, at least the ones that matter most to the market, may not be as high as everyone assumes. He says that while overall profit margins are the highest they have ever been, the profit margins of the companies in the S&P 500 (SPX) are not that out of line from other economic rebounds.
The average after-tax profit margin of the companies in the index was 8.5% at the end of the June. That's below the 9.5% they hit in early 2007. What's more, profit margins for the S&P actually fell last year, and that didn't seem to upset the market. Stocks were still up over 12% in 2012, and another 19% this year as well, though margins have been climbing again.
There are two points to be made here. The big economic one is that the split between the two profit measures suggests the biggest margin gains of the last few year have been coming more from small companies and not from the giant ones in the S&P 500 index. The conventional wisdom is that profit margins are up because companies are moving jobs overseas, cutting labor costs, and avoiding taxes. Smaller companies tend to improve their margins because of innovation and technological gains. Over the long haul that's better for the economy, even if it still means fewer jobs now.
The second point is that while profit margins, at least for the big companies that matter most to the market, are high, they're not historically high. In fact, they are not at the point at which they are unsustainable, which is what everyone is worried about. Profit margins could stay high for a while. James Paulsen of Wells Capital Management says the real thing that will kill profits is inflation, which has been low, and is likely to stay low as long as the economy remains weak.
If the economy does pick up, then profit margins may indeed fall, but by then sales will be rising faster, and that will boost corporate bottom lines. Profit margins might not matter as much.
"Margins are high and likely to come down," says Paulsen. "I just don't think that means we are entering a bear market."
The author of the new Dao of Capital -- a hedge fund manager and former top trader for Nassim Taleb -- sees a 40% drop looming in the S&P 500.
By Scott Cendrowski, writer
FORTUNE -- "You know what I mean?" Mark Spitznagel has just finished explaining one of the paradoxes of today's business world. Spitznagel, 42, is the hedge fund manager who returned more than 100% during 2008. He was Black Swan MORESep 25, 2013 12:54 PM ET
Dow Jones says a goal of the 30-stock index is to capture the pulse of the broader economy. So why replace a rebounding Bank of America with Goldman Sachs?
FORTUNE – In the biggest change of the 30-stock index in nearly a decade, three companies will be replaced on the Dow Jones Industrial Average. Alcoa, Bank of America, and Hewlett-Packard are out, Nike, Goldman Sachs, and Visa (V) are in.
The shake-up MORENin-Hai Tseng, Writer - Sep 10, 2013 1:27 PM ET
Despite slower earnings growth expected overall this earnings season, America's big banks aren't sweating it.
FORTUNE – U.S. stocks rose Tuesday as earnings started on a positive note with Alcoa (AA) beating Wall Street expectations. Though some still consider the industrial giant a bellwether for earnings across corporate America, it's unlikely to say much about how other companies will have fared during the three months ending in June.
Analysts expect to see MORENin-Hai Tseng, Writer - Jul 10, 2013 5:00 AM ET
Even if the the Fed chief's positive outlook for GDP pans out, it could still be bad for your 401(k).
FORTUNE -- Following the two-day 550 point decline in the Dow Jones industrial average last week, a number of commentators recommended stock investors follow Churchill: Keep calm and carry on.
They argue that Ben Bernanke is pulling back the Federal Reserve's stimulus for a reason investors should like: The economy is improving. MOREStephen Gandel, senior editor - Jun 24, 2013 5:00 AM ET
All of the market dislocations -- Treasuries, commodities, etc. -- were percolating underneath the surface well before this frenzy.
By Keith McCullough, Hedgeye
FORTUNE -- What an epic 48 hours it has been. Just. Total. Chaos.
We are officially going over the waterfall now. Boats are in midair. People are hanging on trees. Everybody is scrambling, trying to explain what they missed. Trying to make sense out of it all. Hat tip to MOREJun 21, 2013 10:00 AM ET
On Thursday, the S&P 500 hit an all-time high. Stocks will have to leapfrog a drop in earnings for the index to climb even higher.Stephen Gandel, senior editor - Mar 29, 2013 12:55 PM ET
Stocks have added $11.3 trillion in value, or 138%, since the market bottomed four years ago. That's an annual compounded return of more than 26%.
FORTUNE -- It's so much fun to own stocks these days, with the Dow Industrials and Wilshire 5000 index setting one new high after another, and the Standard & Poor's 500 within 1% of doing the same. Watching the value of your portfolio rise is such MOREAllan Sloan, senior editor-at-large - Mar 8, 2013 9:03 AM ET
The gap between sales and earnings growth is shrinking. That's a very good sign.
FORTUNE -- It's not always all about the bottom line.
Analysts and investors are normally focused on corporate profits. But the most interesting sign of where the market and the economy are headed this earnings season could be coming from the top of corporate ledgers, rather than the bottom.
Of the 147 companies in the S&P 500 that reported MOREStephen Gandel, senior editor - Jan 28, 2013 5:00 AM ET
Three years and still kicking.
Stocks, after stumbling last week, were up on Monday, in part because of comments from Ben Bernanke that suggests the Fed might be willing to do more to goose the economy. That's sure to lift the spirits of the crowd that believe the three-year bull run in stocks is far from over. Burton Malkiel recently became the latest high-profile market commentator to proclaim that stocks are MOREStephen Gandel, senior editor - Mar 26, 2012 2:57 PM ET
|Homeless college students seek shelter during breaks|
|Five things you didn't know about Bernie Madoff's epic scam|
|Budget deal hits federal workers|
|Snowden docs had NYTimes exec fearing for his life|
|Don't fight it. Bitcoin has a bright future|