The Rich Are Getting Richer

Profit margins have been steadily rising for huge companies, but margins have been stagnant or falling for smaller companies. Clearly, the large are getting richer. But viewed a slightly different way we see an even more exaggerated trend: the rich are getting richer.

Forget market cap for a moment. Instead of sorting stocks on their size and then calculating their aggregate profit margins, below we sort stocks based on their current margin and then calculate their aggregate margin (total earnings divided by total sales). This tells us what the current margins are for companies that have the highest margins to begin with. The trend is clear:

This is a fun way of visualizing the trend.

 

margins sorted by marginThe margins of high margin businesses are expanding. The margins for low margin businesses are falling. The same holds true across most sectors, especially in consumer staples, technology, and financials, and health care.

first four sectors PMargins second four sectors Pmargins Utilities and telco Pmargins

We know that the markets overall margin is much more driven by high margin technology and financial firms today than it was several decades ago. Will these trends continue? Will the rich keep getting richer? Let me know what you think in the comments section below.

 

Note: this includes all U.S. stocks with market caps> $200MM inflation adjusted through time.