Goldman Sachs Says It May Be Forced to Fundamentally Question How Capitalism Is Working

One of the most heated debates among investors is the question of whether corporate profit margins can maintain their elevated level, or whether they will inevitably mean revert.

Here's a quick look at S&P 500 profit margins, for example, going back over 25 years. They remain high by by historical standards.

A new note from Goldman Sachs Group Inc. analysts led by Sumana Manohar looks at the bull and bear arguments for the profit margins debate.

Manohar argues that profit margins have expanded thanks to three key trends: strong commodities prices, emerging market cost arbitrage (companies making things more cheaply in emerging markets), demand growth from emerging markets, and improved corporate efficiency driven by the use of new technology. 

Continuing one of its major analytical themes of recent months, Goldman also notes that the market hasrewarded companies that have undertaken mergers and share buybacks, compared to companies that  have invested internally, further bolstering margins.

Goldman goes through both sides of the argument. On the bull side, the bank says that ongoing consolidation in industries, cost deflation, and tighter purse strings help keep a floor under margins. 

Ultimately though, it thinks that the above trends, coupled with weak demand and general industrial overcapacity, mean that margins are likely to come down.

Goldman writes: "We are always wary of guiding for mean reversion. But, if we are wrong and high margins manage to endure for the next few years (particularly when global demand growth is below trend), there are broader questions to be asked about the efficacy of capitalism."