More Moats, More Profits

Profit margins have expanded rapidly over the past three decades. That, combined with strong optimism for future growth, has driven market earnings multiples to extreme levels, exceeded only by valuations seen in the late-1990s’ euphoric dot-com market and the 1929 raging bull market 

Damien Conover 18.01.2018 | 14:39 Michael Holt, CFA
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We view overall stock market valuations as stretched, with close to 60% of our universe trading above our fair value estimates in October. We find evidence, however, that the presence of economic moats is increasing among the world’s largest firms, suggesting that elevated profit margins relative to historical levels may not completely disappear when the business cycle turns.

While we do expect a partial reversion to the historical valuations of the past as economic pressures build, the durability and defensibility of the largest firms’ competitive positions suggest that profitability levels will not fully revert to historical midcycle levels.

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Damien Conover  is a guest author

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