How Deglobalization May Alter U.S. Equity Portfolios
Since the early 1990s, underlying market forces have paved the way for profitability growth and significant profit margin expansion at U.S. corporations. Globalization increased while labor’s collective bargaining power weakened. Interest rates (until this year) and tax rates declined. Antitrust enforcement abated while technology helped drive efficiencies and greater economies of scale. Together these forces drove nearly 5% pretax margin expansion over the succeeding decades. Without this expansion, strategists calculate pre-pandemic U.S. equity values would have likely been 40% lower.
Most economists would agree globalization — kicked off when China entered world trade in 2000 — was the biggest contributor to U.S. profit margin expansion: As technology enabled market integration, American companies began outsourcing labor to China and other emerging economies at the same time as they began importing large volumes of intermediate and final goods from those countries. Outsourcing labor and importing materials helped hold down inflation and capital intensity. As a result, China and emerging nations saw their world exports double, reaching 40% in 2021, and American companies, particularly those in the technology sector, saw profits soar.
The days of persistent profit margin expansion, however, may be coming to an end. In her recent piece, US Core Equity Portfolio Manager, Michelle Buckley, analyzes how the Covid-19 pandemic and the concurrent Great Resignation may have reinstated the traditional relationship between compensation and productivity, its implications for US portfolios and influence on capital allocation for all Americans.
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