FactSet just told everyone what technical analysts have known for months. Stocks go up because profit margins expanded to record levels. Not revenue growth. Margin expansion. Companies squeezed more profit out of every dollar while retail traders convinced themselves this was a sales story.
The charts show earnings climbing faster than sales. That's the definition of margin expansion. You'd think someone buying stocks would want to know this. You'd be wrong. Retail saw green candles and started Googling "is now a good time to buy SPY calls."
Here's what actually happened. Corporations raised prices. Customers paid them. Costs didn't rise as fast. The difference went straight to the bottom line. Record margins appeared. Stocks rallied. Every step of this process was visible in the data. None of it required a headline to confirm.
But the headline exists anyway. These charts show why stocks keep rallying. As if the rallying itself wasn't the chart. As if you needed FactSet to explain that higher earnings make stock prices go higher. This is like hiring a meteorologist to confirm that rain makes things wet.
The best part is what happens next. Margins are at record highs, which means they have nowhere to go but down or sideways. You can't expand margins forever unless you're selling air. But retail will read this headline as bullish. They'll see "highest on record" and think it means buy. They won't ask what happens when margins compress. They won't wonder if record highs might be a top. They'll just click the buy button and wait for the charts to keep doing what they already did.
Somewhere right now a guy who learned what profit margins are from this article is explaining margin expansion to his coworkers like he discovered it himself.
Photo by Maxim Hopman on Unsplash
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