A reversal of the strong growth seen over the years in U.S. corporate profit margins could lead to a "lost decade" for equity investors, Ray Dalio's Bridgewater Associates warns.
The margins, which have provided a big chunk of the excess return of equities over cash, could face a shift that would go beyond the current cyclical downturn in earnings, Bridgewater analysts wrote in a note to clients dated Tuesday.
"Globalization, perhaps the largest driver of developed world profitability over the past few decades, has already peaked," the analysts said. "Now the U.S.-China conflict and global pandemic are further accelerating moves by multinationals to reshore and duplicate supply chains, with a focus on reliability as opposed to just cost optimization."
The pandemic-induced collapse in demand has already resulted in a huge fall in profit margins in the short term, the analysts added.
Intel Corp. and Taiwan Semiconductor Manufacturing Co. are cited as two examples of companies that have announced their intentions to build production facilities in the U.S., despite higher costs.
"Even if overall profits recover, some companies will die or their shares will devalue along the way. Left with lower levels of profits and cash shortfalls, companies are likely to come out on the other side of the coronavirus more indebted," the analysts warned.
Bridgewater has made $58.5 billion for its clients since its beginning in 1975, the most by any hedge fund, according to estimates by LCH Investments.
However, the hedge fund giant suffered a 15% drop in assets under management during March and April in the wake of heavy losses at its flagship trading strategy. Assets fell to $138 billion at the end of April from $163 billion at the end of February, according to a May 29 filing posted on the U.S. Securities and Exchange Commission's website.