Monday, 28 March 2016

US stocks looking overbought, facing margin squeeze

Despite the resilience of the stock market rally so far, there have been signs that it may have trouble continuing.

Last week, Bespoke reported that the net percentage of overbought stocks in the S&P 500 surged above 75 percent, the highest in over three years.

This comes at a time when corporate profit margins are getting squeezed. Corporate after-tax profits in the fourth quarter were 15 percent below year-earlier levels. After-tax profits as a share of gross domestic income was 7.5 percent, well below that in the second quarter of 2013, when the profit share peaked at 10 percent.

In contrast, employee compensation came to 53.6 percent of gross domestic income in the fourth quarter, up from 52.8 percent a year earlier.

Justin Lahart thinks that employers have more bargaining power, and that companies may have to pay up.

"So even if the punk global environment improves, the margin squeeze can still get worse," he wrote. "That doesn’t leave much hope for a profits revival."

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