Are Stock Market Margins Headed in the Right Direction?

When it comes to investing in public equities, a key factor when evaluating a stock is the level and the future path, of profit margins or simply "margins". At the level of individual companies, the path of margins has major implications on the prospect for earnings growth and can drive major shifts in valuations if it is seen to be improving or deteriorating.

Investors also look at margins at a broader equity market level, by aggregating the outlook across a range of companies, to assist in making asset allocation decisions.

Margins - the past, present, and future

Looking back at where margins have been and where they are today is critical in helping to understanding where they headed. To help provide some insight into where margins may be headed, TD Asset Management Inc. (TDAM) recently published an article titled Getting to the bottom of – the bottom line that helps readers get a better understanding of the importance of margins and what factors can positively and negatively affect them moving forward.

Over the last three decades we have witnessed margins expand for the S&P 500 Index, driven by both operating gains (businesses have become more efficient in generating sales into profits), as well as non-operating gains (driven by lower taxes and interest costs). While margins have increased over the long run, they are typically pro-cyclical and move up and down with the economic cycle. This is driven by operating and financial leverage, to rising and declining sales. There have been five key drivers of higher margins over the last 30 years:

Will corporate margins continue to post gains in the years ahead?

Flat to modestly higher

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