Are Corporate Profit Margins At Peak? Not Really

Corporate profit margins are thought to have risen to pre-crisis levels, part of the bull case for US equities, but this picture underestimates the impact that taxeswill have on the bottom line even if consensus growth estimates turn out to be accurate.

“Corporate profitability is perceived to be at record levels even as eight of the 10 S&P 500 sectors are generating EBIT margins below their 2007 highs and investors do not fully comprehend the impact of lower effective tax rates on EPS,” writes Citi analyst Tobias Levkovich. “While top-line growth is likely to be achieved in 2014, which then can drive operating leverage, some of the earnings benefit will be chipped away by probable tax rate...