Elon Musk's cost-cutting plan could trigger a U.S. stock market bear trend!

Source: JIN10 Data

Senior media commentator Mark Hulbert said that stock market investors are hoping the Department of Government Efficiency (DOGE) will substantially reduce the United States’ budget deficit, but for them this is not necessarily good news.

This is because there is a close correlation between the budget deficit as a share of U.S. GDP and a company’s profit margin. A sharp reduction in government deficits will almost certainly lead to a correspondingly sharp decline in corporate profit margins.

This could be very bearish for the stock market, since the bull run in recent years has been built mainly on steadily expanding profits. With everything else unchanged, if the S&P 500’s Operating Profit Margin is not higher than the average over the past 30 years (7.37%), instead of the 2024 estimated level of 11.88% (the earnings for 2024’s fourth quarter have not been finalized), then the index would have to fall by 38%.

The chart below shows the year-over-year changes in the S&P 500’s operating profit margin and the budget deficit as a share of U.S. GDP. This correlation is astonishing.

In a recent report, StoneX Group’s global macro strategist Vincent Deluard reminded readers of this correlation.

As Deluard explained: “Public accounting requires that the public sector’s deficit equals the private sector’s surplus. When the government spends $1 trillion on green infrastructure, data centers, or vaccines, private companies and employees eventually cash that check… U.S. growth and profit margins have been unusually high because the U.S. government has maintained a 7% deficit rate four years after the end of the pandemic.”

What if the government spending that DOGE cuts is indeed wasteful and inefficient? Wouldn’t that be beneficial for the overall economy—especially corporate profit?

Deluard agrees, but he warns that the economic benefits of cutting wasteful government spending will show up in the long run, while the bearish impact on corporate profits will be short-term.

“Releasing these resources (by eliminating wasteful spending) to the private sector may support long-term prosperity, but it certainly harms short-term growth. Paying government employees to dig holes and fill them in the evening can increase GDP and private profits—vice versa.” he explained

Cutting wasteful government spending is a commendable goal. But investors shouldn’t overlook the relationship between public deficits and private profits. Notably, Deluard predicts that the U.S. stock market will enter a bear market later this year.

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责任编辑：王许宁