NEW YORK (TheStreet) --Investors' focus may shift to profit margins as corporate earnings season ramps up.
Investors have been watching economic data closely to see if tighter monetary policy is justified. The numbers have been better than expected, which has helped boost stocks.
On Wednesday, the Federal Reserve released minutes from its December meeting stating that policymakers intended on further reining in stimulus while keeping short term rates low. As much as economic data have outperformed expectations, investors now must justify valuations through corporate results.
Less stimulus leads to more reliance on companies producing sustainable results. Borrowing costs continue to rise, which creates more demand for increased profits and a steady growth in cash flow to keep valuations elevated.
Relatively high profit margins helped companies navigate through the tough times of the financial crisis. Increased efficiency as opposed to more adding workers allowed companies to generate strong profits on weak revenue.
Now that the economy has grown out of the crisis, the labor market has steadily improved. The payrolls number on Friday missed expectations, but the winter cold shouldn't derail the underlying trend in employment.
Jobs are being created and companies aren't under as much pressure to be efficient machines to produce steady output. Improved consumer spending has led to increased revenue for products and services. This improvement showed up in the latest manufacturing and services economic numbers.
Contracting profit margins were seen in full force during the holiday shopping season. Demand was high, but companies offered discounts because of the competition between online and physical stores. This competition will continue into the future and should weigh on corporate margins as companies aim to generate foot traffic.
The contraction of margins may be a catalyst for diminishing valuations in coming months, but that could be offset by higher revenue and consumer demand.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.