Profit Margin Pressure

Casualties from the Fed’s looming tightening cycle include the global yield curve and global profit margins.

DIN

Over the past two decades, the G7 yield curve has been an excellent leading indicator of global margins. Currently, not only are short-term borrowing costs becoming prohibitive, at the margin, but the incentive to raise debt and retire equity to boost EPS is diminishing. This suggests that profit margins have likely peaked for the cycle.

Moreover, the deteriorating health of the overall corporate sector is also signaling that the path of least resistance for margins is lower.

Finally, global junk bonds are pointing to a drop in equities in the coming months, if the historical correlation holds.

Indeed, we are heeding the bond market’s message, and are concerned about margin trouble and the potential for an EM non-financial corporate sector accident: remain defensively positioned.

For additional information, please visit the Global Alpha Sector Strategy website at gss.bcaresearch.com.

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