over 3 years ago • 2 mins
The global pandemic could undo 20 years of increasing profit margins that have juiced stock market returns, threatening a “lost decade” for investors, according to Ray Dalio’s hedge fund Bridgewater Associates.
Companies face three big hurdles to their future long-term profitability, Bridgewater, the world’s biggest hedge fund, wrote in a note to clients obtained by Finimize: trickier cross-border trade, higher taxes, and climbing debt.
Secondly, the US government is likely to impose higher taxes on companies to help close a budget deficit swelled by fighting the effects of COVID-19. That would reverse a decades-long trend that has seen the effective tax rate paid by US companies fall from about 45% 40 years ago to 20% nowadays.
And, finally, the pandemic is forcing companies to take on more debt, diverting an increasing share of income to interest payments. Bridgewater, which puts great emphasis on divining “principles” it believes will drive markets over the long term, reckons that these trends could push the already tepid outlook for stock market returns over the next decade all the way down to zero.
Stocks are nothing without profits. No profits, no cash to grow the business or return to shareholders. Bridgewater argues that US stocks would be a massive 40% lower today without the expansion in profit margins we’ve seen over the past 20 years 😮
If Bridgewater’s analysis is correct, the long-term outlook for US stocks might not be great. But the hedge fund did point to one brighter spot for investors: economic crises can allow companies to push through the kind of radical changes, like automating routine jobs, that can support profit margins – and hence stock prices – in the long run.
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