Corporate profit margins are falling and here’s what it means for investors

Corporate profits are at risk of falling and here’s what it means…

In 2017, the biggest change to the tax code in 3 decades reduced US corporate tax rates from 35% to 21% — leading to higher corporate income. Since then, the S&P 500 is up by over 57%.

But that trend is at risk of reversing, with Joseph Kalish of Ned Davis Research (via MarketWatch) speculating that corporate profits will decline in the next few years due to:

• Higher corporate taxes pushed by Biden’s administration.
• Higher interest rates are expected to rise over the next few years.
• Higher labor costs from shortages of skilled talent.

Companies are also dealing with rising material and freight costs from pandemic impacts — threatening to lower margins.

What does this mean? In theory, if the average corporate profit margins do fall, stocks, which are reliant on corporate profits, will be negatively impacted.

• But reality is more complicated. According to an analysis by Ben Carlson, there’s no clear correlation between profit growth and stock returns.

It’s difficult to rely on a single factor to justify market movements with hundreds of other factors affecting it all at once.

But what we can rely on is this — staying invested in the market, so you don’t miss the best 10 days of the market that can reduce your returns by 38%.