Advisor Flipbooks

2024 SEI ® Data as of 12/31/2023 unless otherwise indicated. 9 Exhibit 12: The new normal looks like the old normal (but it isn't) Source: U.S. Bureau of Economic Analysis, SEI. More importantly, we also believe that profit margins are likely to come under pressure as previous secular tailwinds turn into headwinds. This includes (1) structural tightness in the labor market keeping wage inflation higher for longer; (2) higher financing costs that will exert an even greater impact in future years as lower-cost debt matures; (3) increased costs and lower productivity caused by a reduction of scale as companies diversify their supply chains away from China; (4) higher corporate taxes as governments seek to repair their fiscal positions; and (5) the expense of adapting to new government environmental regulations aimed at drastically reducing the use of fossil fuels. Productivity improvements can certainly help to offset a portion of these drivers of reduced profit margins, but we think that companies with pricing power will push these costs onto the end users of their products and services. Exhibit 13 shows that economy-wide profit margins have already declined from the peak levels reached in 2021, and lately have been in the same range as in the five-year period between 2010 and 2015, a time when the economy was struggling to grow out of the Global Financial Crisis. Exhibit 13: Meager margins Source: U.S. Bureau of Economic Analysis, National Bureau of Economic Research, Philosophical Economics, SEI. Powell plays Santa and markets go wild In their mid-December meeting, Fed policy-makers clearly signaled their expectation that the U.S. economy will experience a soft landing, in which growth and inflation slow but the economy does not enter a recession. The Federal Open Market Committee's (FOMC) median forecast projected a rise in GDP of 1.4% in 2024, following a 2.6% increase in 2023. Growth would then accelerate to 1.8% and 1.9% in 2025 and 2026, respectively. The unemployment rate is forecast to rise to only 4.1% from November's 3.7% rate and stay there through 2026. Core PCE inflation is projected to finish 2023 at 3.2%, and then fall to 2.4% in 2024, 2.2% in 2025 and 2.0% in 2026. We tend to be a bit more pessimistic about the pace of growth in 2024, but the big difference between the Fed -10 -5 0 5 10 15 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Percent change over 12-month span Personal consumption expenditures price index U.S. Recession Periods Services Non-Durables Durables 4 6 8 10 12 14 16 18 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 2018 2023 Percent U.S. Recession Periods Net Profit Margin: Domestic Corporate Business

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