Trivariate Research CEO Adam Parker predicts that the US stock market will remain at high valuation levels driven by rising profit margins, particularly due to factors like technological advancements and structural changes. Analysts anticipate margin expansions in the coming year, with a focus on gross margins indicating continued expensive market conditions.
US Stock Market Likely to Remain Expensive Due to Rising Profit Margins
The US stock market is expected to stay at high valuation levels for several years, driven by cyclical, structural, and technological factors, according to Adam Parker, CEO of Trivariate Research. Despite concerns about the market being overpriced, the S&P 500 has seen significant growth, including nearly a 40% increase in early 2023.
Key factors to watch include gross margins, which indicate a company’s profitability after deducting the cost of goods sold from revenues. Higher gross margins generally lead to a higher enterprise-value-to-sales multiple, making the market appear expensive.
Several variables could impact these margins. Pricing strategies of products can positively affect margins if companies raise prices without losing demand. Recent price cuts from retailers like Target, Amazon, and Walmart have had little overall effect on market pricing. Additionally, labor cost pressures are easing, with many companies reporting improved productivity offsetting wage increases.
Analysts predict that nearly 75% of the top 500 US companies will expand margins in the next year, with a high accuracy rate in these forecasts. This anticipated margin expansion is not just cyclical but also structural. The increased presence of software and biotech companies, which typically have lower inventory costs, has shifted the equity market’s composition. As a result, current gross margins are higher than long-term averages.
Technological advancements, especially in artificial intelligence, are expected to further enhance margins. Growth companies discussing AI in earnings calls are already showing better margin expansion compared to those not focusing on AI. This trend is particularly noticeable in sectors like healthcare services, financials, and technology, where revenue growth can occur without substantial additional hiring.
Thus, the expectation is that the US equity market will trade at higher multiples for an extended period due to sustained higher profit margins.
