S&P 500 Reports Lower Year-Over-Year Net Profit Margins for Second Straight Quarter

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The market remains concerned about rising inflation. Consumer prices rose 9.1% in June, the largest year-over-year increase since 1981. Given these concerns, what is the S&P 500 reporting for a net profit margin for the second trimester ?

Net profit margins down but still above five-year average

The S&P 500 net profit margin (combined) for Q2 2022 is 12.4%, which is lower than the estimate of 12.7% at the start of the quarter (March 31) and lower than the net profit margin of 13% a year ago. However, it was higher than the five-year average net profit margin of 11.2% and slightly higher than the prior quarter’s net profit margin of 12.3%.

If 12.4% is the actual net profit margin for the quarter, it will be the second consecutive quarter in which the index’s net profit margin has declined year over year. On the other hand, it will also tie the mark with the fourth quarter of 2021 for the fourth highest net profit margin reported by the index since FactSet began tracking this metric in 2008.

At a sector level, two sectors recorded (or are expected to record) a year-over-year increase in their net profit margins in Q2 2022 compared to Q2 2021: energy (15.6% vs. 6.5%) and industry (9.8%). against 9.0%). On the other hand, nine sectors report (or are expected to report) a year-over-year decline in their net profit margins in Q2 2022 compared to Q2 2021, led by the Financials sector (16.1% vs. 21.9%).

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What is driving the year-over-year decline in net profit margins?

Higher costs likely have a negative impact on net profit margins. Producer prices rose 11.3% in June, close to the record 11.6% increase recorded in March 2022. In the previous earnings season, 417 S&P 500 companies cited “the inflation” on first-quarter earnings calls, which was the highest number in more than 10 years. However, companies are also raising prices to offset these higher costs, as the S&P 500 is expected to post double-digit revenue growth for the sixth straight quarter.

In addition, companies face a tough year-over-year comparison with unusually high net profit margins in the prior year quarter. In the second quarter of 2021, the S&P 500 posted a net profit margin of 13%, the highest net profit margin reported by the index since FactSet began tracking this measure in 2008.

Despite still-high inflation, it’s interesting to note that analysts estimate that S&P 500 net profit margins will be higher than in Q2 2022 for the rest of this year. To date, estimated net profit margins for Q3 2022 and Q4 2022 are 12.9% and 12.7% respectively.

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