Morningstar Magazine - December 2017/January 2018 - 29

Spotlight

Abnormal
Profitability

Do Vanguard and BlackRock Own Too Much
of Corporate America?

34

Passive Firms Take Active Approach
to Stewardship

38

More Moats, More Profits
Margins are above historical
norms. Here's why that
might not completely change.
PROFITABILITY

Damien Conover and Michael Holt

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 ( EXHIB IT 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. While we do expect a partial
reversion to the historical valuations of the
past as economic pressures build, the durability
and defensibility of the largest firms' competitive
positions suggest that profitability levels
will not fully revert to historical midcycle levels.

global.morningstar.com/Morningstarmagazine

29


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Table of Contents for the Digital Edition of Morningstar Magazine - December 2017/January 2018

Contents
Morningstar Magazine - December 2017/January 2018 - Cover1
Morningstar Magazine - December 2017/January 2018 - Cover2
Morningstar Magazine - December 2017/January 2018 - 1
Morningstar Magazine - December 2017/January 2018 - 2
Morningstar Magazine - December 2017/January 2018 - Contents
Morningstar Magazine - December 2017/January 2018 - 4
Morningstar Magazine - December 2017/January 2018 - 5
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