Skip to content
    1. Overview
    2. Alternative Managers
    3. Consultants
    4. Corporations
    5. Family Offices
    6. Financial Advisors
    7. Financial Institutions
    8. Individuals & Families
    9. Insurance Companies
    10. Investment Managers
    11. Nonprofits
    12. Pension Funds
    13. Sovereign Entities
  1. Contact Us
  2. Search
  3. Client Login
Save to bookmark
MarketScape · 08.21.23

How to Reconcile Dueling Outlooks for U.S. Earnings

Amid dueling forecasts, we anticipate a slight adjustment in the U.S. equity margins. Gain clarity from Deputy CIO and CIO of Global Equities Michael Hunstad, Ph.D. as he discusses current conditions.

  • Markets & Economy
  • Equity Insights
  • Market & Investment Trends

Key Points

What this is

Contradictory cases are being made for U.S. profit margin expansion or contraction. We outline our view.

Why it matters

With advancements in artificial intelligence, expectations of expanding profit margins next year from near-record highs this year have elevated stock valuations.

Where it's going

We think higher interest rates will cause profit margins to decline slightly over the near-term. The financial benefits of artificial intelligence will likely take a while to emerge.

With U.S. equity profit margins near historical peaks, there is a widely held view that contraction is inevitable. Over the past decades, long-term reductions in both interest and tax rates have buoyed margins to their current levels. But those trends are reversing. On the other hand, analyst consensus expectations point to significant margin expansion, driven primarily by anticipated gains from artificial intelligence. Both stories can’t be correct. We feel analyst expectations are too optimistic given current multiples and that rising interest rates will put downward pressure on margins, although not to the degree suggested by the current market narrative. Let’s take a closer look.
 

Despite a selloff in most major equity indices last week, forward remain elevated by historical standards. This suggests analysts believes earnings and margins are below normal and likely to increase. With an expectation of 8% revenue growth and 17% earnings growth, implied profit margins are anticipated to jump a full percentage point over the next year, a substantial increase off their already near-record levels. Much of this improvement is attributed to the expected efficiencies of artificial intelligence, but we feel those productivity gains are nebulous and hard to forecast, especially in the near term.
 

In stark contrast, market pundits are painting a rather gloomy picture on the direction of margins. Empirical evidence suggests the decline in interest rates and marginal tax rates have contributed materially to margin expansion over the last two decades. With the potential reversal of these trends combined with the challenges of shifting supply chains and overhead of the green transition, some suggest margins are likely to contract materially in the short term.
 

While we think there will be productivity gains to , we believe the analyst outlook is overly optimistic as it will take time for these affects to take hold. In the near-term, we think the pressures of rising interest rates will outpace the efficiencies of artificial intelligence, but we do not expect a margin collapse. Any decrease will be modest and at least partially tempered by growth in the tech sector with its already outsized margin contributionWe feel there will be modest, tenths of a digit, declines in margins over the near-term, but do not share the euphoria of analysts or the gloom-and-doom of a potential margin collapse.

Main Point

Not So Optimistic, Not So Pessimistic

While we think artificial intelligence will create productivity gains, analysts' outlooks likely are overly optimistic. In the near-term, we think the pressures of rising interest rates will outpace the efficiencies of artificial intelligence, but we do not expect a margin collapse.

Related Content

MarketScape

  • Read Now
Teal marble rolling ahead of white blocks

Michael Hunstad, Ph.D.

Deputy Chief Investment Officer & Chief Investment Officer of Global Equities

Michael Hunstad is deputy chief investment officer and chief investment officer of global equities for Northern Trust Asset Management. Michael is a member of the Asset Management Executive Group and has oversight of all equity portfolio management, research and trading activities including quantitative, index and tax-advantaged strategies. Additionally, he assists with the development of investment vision, strategy portfolio construction and risk management framework for the firm’s broad investment platform.

Read Bio

Contact Us

Interested in learning more about our expertise and how we can help? 

IMPORTANT INFORMATION

Northern Trust Asset Management (NTAM) is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.

 

Issued in the United Kingdom by Northern Trust Global Investments Limited, issued in the European Economic Association (“EEA”) by Northern Trust Fund Managers (Ireland) Limited, issued in Australia by Northern Trust Asset Management (Australia) Limited (ACN 648 476 019) which holds an Australian Financial Services Licence (License Number: 529895) and is regulated by the Australian Securities and Investments Commission (ASIC), and issued in Hong Kong by The Northern Trust Company of Hong Kong Limited which is regulated by the Hong Kong Securities and Futures Commission.

 

For Asia-Pacific (APAC) and Europe, Middle East and Africa (EMEA) markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. This document may not be edited, altered, revised, paraphrased, or otherwise modified without the prior written permission of NTAM. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. NTAM may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, its accuracy and completeness are not guaranteed, and is subject to change. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor.

 

This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.

 

All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, advisor risk, and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve profits or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe NTAM’s efforts to monitor and manage risk but does not imply low risk.

 

Past performance is not a guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by NTAM. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Net performance returns are reduced by investment management fees and other expenses relating to the management of the account. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. For U.S. NTI prospects or clients, please refer to Part 2a of the Form ADV or consult an NTI representative for additional information on fees.

 

Forward-looking statements and assumptions are NTAM’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.

 

Not FDIC insured | May lose value | No bank guarantee