A reversal of the strong growth seen over the years in US corporate profit margins could lead to a “lost decade” for equity investors, Ray Dalio’s Bridgewater Associates warns.
The margins, which have provided a big chunk of the excess return of equities over cash, could face a shift that would go beyond the current cyclical downturn in earnings, Bridgewater analysts wrote in a note to clients dated June 16.
“Globalisation, perhaps the largest driver of developed world profitability over the past few decades, has already peaked,” the analysts said. “Now the US-China conflict and global pandemic are further accelerating moves by multinationals to reshore and duplicate supply chains, with a focus on reliability as opposed to just cost optimisation.”
The pandemic-induced collapse in demand has already resulted in a huge fall in profit margins in the short term, the analysts added.