The market’s overall profit margin is the result of profit margins within individual sectors, but within sectors it is typically a small group of companies that dominate. Here are some interesting trends related to those companies.
Technology
The technology sector has grown to be a large contributor to the markets overall margin, representing 23.3% of the markets overall margin in 2014 (up from 2.7% in the early 1960s).
Just as the market’s margin is dominated by tech stocks, the tech sector margin is dominated by a small group of stocks at the top. Indeed outside the top 8 stocks, all of which have impressively high margins, the remained 400 or so stocks in the technology sector have a margin that looks much more like the overall market.
Apple, Google, IBM, and Microsoft are the key companies here. If you think their margins are sustainable, then the market’s overall margin may remain higher. Here are their margins in the past 10 years. Capital should rotate into high margin industries and bring down these margins over time, but they haven’t budged much in 10 years.
Concentration at the top
Just like in the tech sector, margins for the overall market are all about the stocks at the top of the heap. The top 20 contributors to the market’s overall margin account for an average 40% of the markets margin over the past 50 years, meaning the fate of these top companies and their margins will have a large impact on the future of market profit margins. Here are the top 20 contributors today. Many of these companies have extremely strong brands and/or moats, meaning their profit margin edge may be hard to disrupt in the near term. I think margins will contract, because arguing against mean reversion is a dangerous game. But given the persistent margins enjoyed by so many companies at the top, I doubt we will soon revisit the margin lows seen in the past.
NOTE: Financials excluded in this post