Is Q4 the Bottom for S&P 500 Net Profit Margins?

Given concerns in the market about inflation, what is the S&P 500 reporting for a net profit margin for the fourth quarter? The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) net profit margin for the S&P 500 for Q4 2021 is 12.0%, which is above the year-ago net profit margin of 11.0% and above the five-year average net profit margin of 11.0%. However, it is below the previous quarter’s net profit margin of 12.9%.

If 12.0% is the actual net profit margin for the quarter, it will mark the second straight quarter in which the net profit margin for the index has declined. On the other hand, it will also tie the mark (with Q3 2018) for the fourth-highest net profit margin reported by the index since FactSet began tracking this metric in 2008.

At the sector level, five sectors are reporting a year-over-year increase in their net profit margins in Q4 2021 compared to Q4 2020, led by the Energy (9.8% vs. NA), Industrials (7.6% vs. 4.5%), and Materials (12.9% vs. 10.2%) sectors. A year-ago net profit margin was not calculated for the Energy sector due to the earnings loss reported by the sector in Q4 2020. Four sectors are reporting net profit margins in Q4 2021 that are above their five-year averages, led by the Energy (9.8% vs. 5.3%), Information Technology (25.8% vs. 21.8%), and Materials (12.9% vs. 9.8%) sectors.

However, only two sectors are reporting a quarter-over-quarter increase in their net profit margins for Q4 2021 compared to Q3 2021: Energy (9.8% vs. 9.0%) and Information Technology (25.8% vs. 25.6%).

What is driving the sequential decline in net profit margins for the S&P 500? Higher costs are likely having a negative impact on profit margins. During the previous earnings season, 305 S&P 500 companies cited “inflation” on earnings calls for the third quarter, which was the highest number in at least 10 years.

It is interesting to note that analysts believe net profit margins for the S&P 500 will improve sequentially over the next three quarters. As of today, the estimated net profit margins for Q1 2022, Q2 2022, and Q3 2022 are 12.4%, 12.7%, and 13.0%, respectively.

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