In “This Time Was Different” I talked at some length about the uniqueness of the Fed’s post-pandemic hiking cycle.

The gist of that short piece is that between already low leverage and the historic term-out opportunity afforded by the monetary policy response to the public health crisis in 2020/2021, blue-chip US corporates were insulated from the tightening cycle. In fact, they ended up with a lower net interest burden despite — indeed, because of — 525bps of Fed hikes, which dramatically increased the payout on corporate cash balances.

The cherry on the proverbial sundae was so-called “greedflation,” wherein the C-suite was able to raise prices above and beyond input cost inflation while in some cases expanding volumes too as “stimmy” coursed through the veins of the American consumer.

The result was record margins, and if you’re looking for a fundamentals-based explanation for subdued equity vol (i.e., if you have a hard time coping with the esoteric technical explanations which explain it at a granular level, and on a high frequency basis), that’ll work.

The figure on the left, from SocGen, shows you the component breakdown for corporate profits since early 2022. The point: Margins have remained at or near records thanks to the tailwind from lower net interest costs. The figure on the right shows you how this normally plays out during the average cycle.

“Profit margins and equity volatility are negatively correlated,” SocGen’s derivatives strategy team wrote. “If this was a normal cycle, and interest costs for corporates had gone up, then profit margins would have been significantly lower and equity volatility much higher by now.”