GMO has published a good article “Bigger’s been better” that tries to explain the dichotomy. The takeaway (and my thought) is that:
- High and rising profit margins mostly happen to the top 50 companies. The rest (next 450 and next 2500). They use internally-generated cash to fund investments and have little need to raise debt. Their ability to generate cash exceeds their ability to invest as they enjoy monopoly/oligopoly power in their core business, but not in new business lines. They have increased their payout ratio over time to return cash to shareholders.
- The next 450 and next 2500 are much less fortunate. The improvement in their profit margin is much more moderate. Their core businesses are not profitable enough for them to ramp up investments, despite record-low borrowing costs in capital markets. They also increase their payout to shareholders, though by raising debt.
- That results in low investment in aggregate and hence low productivity growth in the US.
- Top 50 companies are always powerful in their own sectors, now and historically. But it is striking that the top 50 companies today are more powerful than the top 50 three or five decades ago. What contributes to that is still an open question. Globalization (that opens new markets and lowers production costs)? Tech-friendly regulations?
- What’s clear is that the US has many high-quality companies that cannot be ignored just because of their high valuations.
liyufeili 