Signs of Margin Pressure Ahead

Signs Of Margin Pressure Ahead

  • Banks’ lending standards for C&I loans (typically to large businesses) tightened quite a bit in Q1, which bodes ill for both investment and overall economic growth going forward.
  • For equity investors, this also likely means margins will come under pressure down the road.
  • Besides lending activities, other business-cycle related measures, such as the Leading Indicators and business confidence, likewise show a challenging outlook for profit margins.
  • The difficult inflation dynamic of lower CPI and higher wage inflation is unlikely to support current margins as companies have not been able to pass on wage inflation to consumers.
  • However, lower real interest costs are perhaps the most positive indicator for profit margins going forward.
  • In the near term, the market is supported by much lower earnings expectations.
  • But, by year end, there is a bigger challenge—earnings expectations will be high just when margin pressure is likely to resurface.

Risk Aversion Index: Maintains “Lower Risk” Signal

Our Risk Aversion Index ticked lower in April and stayed on the “Lower Risk” signal. Most risky assets participated and the rally was broad-based. The only fly in the ointment is EM assets. The recent weakness in both Chinese stocks and the Yuan is certainly worth paying attention to.