Grantham, Doll Offer Different Takes On Margins

Are historically high profit margins for U.S. firms sustainable, or will they come bouncing back to the mean — and throw a wrench into the stock market in the process? Blackrock’s Bob Doll and GMO’s Jeremy Grantham have very different takes, according to Bloomberg.

Doll says a weak job market and labor-saving technologies have helped push margins to their current record high levels. And, he doesn’t see either of those trends abating. Sluggish job growth and low interest rates mean that an increase in costs isn’t a threat right now. “We didn’t need a strong economy to get margins high,” he said. “Why do we need a strong one to keep them high?”

Grantham has a different take. Back in August, he called margins “freakishly high”. He thinks we will see a reversion to the mean in profit margins, which is a danger to stocks. His GMO colleague Ben Inker told Bloomberg that “The implication for the stock market is ugly, because it means earnings are unsustainably high.”

Dennis Bryan, co-portfolio manager of the FPA Capital Fund, which is the top-performing diversified U.S. stock fund over the past 25 years, according to Morningstar, shares Grantham and Inker’s concerns. He told Bloomberg that companies may be reaching their limit in wringing out costs. “Will companies be able to keep tightening their belts by cutting millions more Americans out of the workforce?” said Bryan, who has said that he expects “a lot of profit disappointments coming our way”.