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S&P 500 Projected to Report First Year-Over-Year Decline in Net Profit Margin Since 2016

Written by John Butters | Feb 25, 2019

For the first quarter, the S&P 500 is projected to report a year-over-year decline in earnings of 2.7%, but year-over-year growth in revenues of 5.2%. Given the dichotomy in growth between earnings and revenues, there are concerns in the market about net profit margins for S&P 500 companies in the first quarter. What are the expectations for net profit margins for the S&P 500 for Q1?

The estimated net profit margin for the S&P 500 for Q1 2019 is 10.8%. If 10.8% is the actual net profit margin for the quarter, it will mark the first year-over-year decline in the net profit margin for the index since Q4 2016. It will also mark the lowest net profit margin reported by the index since Q4 2017.

Ten of the 11 sectors are projected to report a year-over-year decline in their net profit margins in Q1 2019, led by the Information Technology (20.1% vs. 22.3%), Communication Services (11.3% vs. 13.2%), and Materials (9.1% vs. 10.6%) sectors. The Utilities sector (12.9% vs. 12.8%) is the only sector projected to see a year-over year increase in its net profit margin. In seven of the 11 sectors, more than half of the companies in the sector are expected to see a year-over-year decrease in their net profit margins.

It is interesting to note that analysts expect the index to report higher net profit margins over the next few quarters. Based on current earnings and revenues estimates, the estimated net profit margins for the next three quarters (Q2 2019 through Q4 2019) are 11.5%, 11.9%, and 11.7%, respectively.

To maintain consistency, the earnings and revenue numbers used to calculate the earnings and revenue growth rates published in this report were also used to calculate the index-level and sector-level net profit margins for this analysis. In addition, all year-over-year comparisons for Q1 2019 to Q1 2018 reflect an apples-to-apples comparison of data at the company level. In other words, FactSet used year-ago earnings and revenue data for the current constituents (not the year-ago constituents) in the index when making year-over-year comparisons for index-level and sector-level net profit margins. This methodology was only used for the year-over-year comparisons. The net profit margins in the time series chart below reflect the data for the constituents at the end of each quarter.