Standing at the Margin Peak, the Only Stock Direction Is Down
If investors don’t think profits are sustainable, a sell-off is inevitable.
Photographer: Prakash Mathema/AFP/Getty Images
When Caterpillar Inc.’s chief executive officer raised the possibility on Tuesday that now could be as good as it gets, he awoke his investors and the broader market to a concern that has been nagging some of the smartest money managers for years.
The issue is that the average net profit margin of the companies in the S&P 500 Index is expected to hit just above 11 percent in the first quarter. That would be the highest since at least 1990, which is as far back as Bloomberg has compiled the data. If profit margins are not only high but at their ceiling, which is what Caterpillar’s CEO seemed to be suggesting, that would be a serious problem for the market and perhaps why — along with the fact that 10-year Treasury yields are pushing 3 percent for the first time in years —investors reacted so harshly. Stocks plunged on Tuesday and continued to drop on Wednesday in what has already been a rocky year for the market. As of midday Wednesday, the S&P 500 was down 2 percent in 2018.