More Moats, More Profits
Better standards align manager incentives with shareholder interests.
Profit margins have expanded rapidly over the past three decades. That, combined with strong optimism for future growth, has driven market earnings multiples to extreme levels, exceeded only by valuations seen in the late-1990s’ euphoric dot-com market and the 1929 raging bull market ( EXHIBIT 1).
We view overall stock market valuations as stretched, with close to 60% of our universe trading above our fair value estimates in October. We find evidence, however, that the presence of economic moats is increasing among the world’s largest firms, suggesting that elevated profit margins relative to historical levels may not completely disappear when the business cycle turns.
Damien Conover, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.