S&P 500 Net Profit Margin is Expected to Decline for Third Straight Quarter

The market continues to be concerned about higher inflation. Consumer prices increased by 8.5% in March, which was 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 first quarter?

Net Profit Margin Declining, But Still Above Average

The (blended) net profit margin for the S&P 500 for Q1 2022 is 12.1%, which is below the estimate of 12.3% at the start of the quarter (December 31). It is also below the year-ago net profit margin of 12.8% and below the previous quarter’s net profit margin of 12.4%. However, it is above the five-year average net profit margin of 11.2%.

If 12.1% is the actual net profit margin for the quarter, it will mark the third straight quarter in which the net profit margin for the index has declined. On the other hand, it will also mark the fifth highest net profit margin reported by the index since FactSet began tracking this metric in 2008, trailing only the previous four quarters.

At the sector level, four sectors are reporting (or are expected to report) a year-over-year increase in their net profit margins in Q1 2022 compared to Q1 2021, led by the Energy (11.1% vs. 4.6%) sector. On the other hand, seven sectors are reporting (or are expected to report) a year-over-year decrease in their net profit margins in Q1 2022 compared to Q1 2021, led by the Financials (17.2% vs. 22.7%) sector.

Negative Impact of Higher Costs

What is driving the decline in net profit margins for the S&P 500? Higher costs are likely having a negative impact on net profit margins. Producer prices increased by 11.2% in March, which was the largest year-over-year increase on record. During the previous earnings season, 356 S&P 500 companies cited “inflation” on earnings calls for the fourth quarter, which was the highest number in at least 10 years. However, companies are also raising prices to offset these higher costs, as the S&P 500 is projected to report revenue growth above 10% for the fifth straight quarter.

It is interesting to note that analysts believe net profit margins for the S&P 500 will be higher than Q1 2022 for the rest of the year. As of today, the estimated net profit margins for Q2 2022, Q3 2022, and Q4 2022 are 12.7%, 13.1%, and 12.8%, respectively.

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