US Equity Views: The near and long-term outlooks for S&P 500 profit margins

Goldman Sachs

This is our summary of the ZH Premium post entitled: "We're Going Up": Steve Cohen Turns "Pretty Bullish" As 300 Million AI-Driven Layoffs Send Profit Margins Soaring

Included is the report on which their excellent write up is based at bottom.

According to a report by Goldman Sachs, the profit margin recession seems to be improving, as S&P 500 companies reported margins in line with pre-COVID levels in the first quarter of 2023. However, the report suggests that substantial near-term margin expansion is unlikely. Factors such as elevated wages, interest rates, and inventories pose challenges to margin growth. The risk of a recession also remains a potential downside.

The Bank expresses skepticism about the future prospects of margin expansion, stating that major drivers of margin growth over the past three decades, such as tax rates, interest rates, and the cost of goods sold (COGS), are unlikely to contribute significantly in the coming years. The development of artificial intelligence (AI) is identified as the primary potential long-term support for profit margins. The report suggests that AI could boost net margins by nearly 400 basis points over a decade. However, the economic impact and regulatory response to AI remain uncertain.

While the potential benefits of AI are highlighted, concerns are raised regarding job displacement and the distribution of profits. The report notes that millions of jobs could be at risk due to automation, but this could result in a "margin explosion" for companies.

Hedge fund billionaire Steve Cohen is mentioned as one who sees AI as a significant opportunity, predicting improved profit margins and reduced pressure on the Federal Reserve to curb inflation through interest rate hikes. However, the report acknowledges that the impact on jobs and the broader economic implications of AI adoption are challenging to predict.

Overall, the report suggests that while margins have stabilized, a robust rebound is unlikely in the near term. Long-term margin expansion may be driven by AI, but the potential economic and regulatory impacts remain uncertain. The tension between the benefits and challenges associated with AI, including job displacement, is acknowledged. While some market participants express optimism about AI's potential, concerns about the distribution of wealth and the effects on the labor market persist.

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