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Investors are willing to pay ever-increasing prices for stocks despite the decline in profits growth over the past year. This so-called multiple expansion has subsequently lifted various gauges of theInvestors have an "incredible valuation problem," Andrew Lapthorne, the head of quantitative equity research at Societe Generale, said in a recent note.
One way Lapthorne unearths what is happening is by stacking the profitability of the largest companies in each sector against their smallest counterparts. He found that the gap, which he refers to as corporate inequality, is at its widest since at least 1990. In addition to Lapthorne's observation above, two plain vanilla measures of profitability — EBIT growth and margins — show a deteriorating trend.
And secondly, profit margins are under pressure due to a combination of higher costs and slower sales growth. But even in the public market, there's the nagging question of how much longer investors will continue bidding up prices in the absence of an earnings growth rebound.
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