Concerns about inflation may be rising. U.S. consumer prices increased 2.6% (year-over-year) in March compared to a 1.7% year-over-year increase in February, which marked the largest month-over-month increase (2.6% vs. 1.7%) in the CPI inflation rate since 2009. The jump in consumer inflation is being fed by higher producer prices. The March PPI was up 4.2% (year-over-year), which was the biggest year-over-year increase since September 2011. In addition, more S&P 500 companies (47) have cited the term “inflation” on their earnings calls for Q1 2021 through this point in time in the earnings season in more than 10 years. Given these inflation concerns, what is the S&P 500 reporting for a net profit margin in the first 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 Q1 2021 is 11.6%, which is above the year-ago net profit margin, the five-year average net profit margin (10.6%), and the previous quarter’s net profit margin. If 11.6% is the actual net profit margin for the quarter, it will mark the third-highest net profit margin reported by the index since FactSet began tracking this metric in 2008, trailing only Q3 2018 (12.0%) and Q2 2018 (11.7%).
At the sector level, nine sectors are reporting a year-over-year increase in their net profit margins in Q1 2021 compared to Q1 2020, led by the Financials sector (21.5% vs. 10.2%). However, only five sectors are reporting net profit margins in Q1 2021 that are above their five-year averages, again led by the Financials sector (21.5% vs. 15.1%). If 21.5% is the actual net profit margin reported by the Financials sector for Q1, it will mark the highest net profit margin reported by this sector since FactSet began tracking this metric in 2008. The current record for the sector is 18.0%, which occurred in Q1 2018. However, it should be noted that earnings and net profit margins for the Financials sector are being boosted on a year-over-year basis due to a substantial year-over-year decline in provisions for loan losses. These provisions for loan losses have no impact on top-line growth, but can have a substantial impact on bottom-line growth. For more details, please refer to this recent article.
Analysts also believe net profit margins for the S&P 500 will continue to be above 11.0% for the remainder of 2021. As of today, the estimated net profit margins for Q2 2021, Q3 2021, and Q4 2021 are 11.4%, 11.8%, and 11.8%, respectively.
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Mr. John Butters is Vice President and Senior Earnings Analyst at FactSet. His weekly research report, “Earnings Insight,” provides analysis and commentary on trends in corporate earnings data for the S&P 500 including revisions to estimates, year-over-year growth, performance relative to expectations, and valuations. He is a widely used source for the media and has appeared on CNBC, Fox Business News, and the Business News Network. In addition, he has been cited by numerous print and online publications such as The Wall Street Journal, The Financial Times, The New York Times, MarketWatch, and Yahoo! Finance. Mr. Butters has over 15 years of experience in the financial services industry. Prior to FactSet in January 2011, he worked for more than 10 years at Thomson Reuters (Thomson Financial), most recently as Director of U.S. Earnings Research (2007-2010).
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