S&P 500 Reporting A Lower Net Profit Margin For 5th Straight Quarter

The market continues to be concerned about higher inflation. Consumer prices increased by 8.2% in September, which marked the 7^th consecutive month the percentage exceeded 8% (year-over-year). Given these concerns, what is the S&P 500 reporting for a net profit margin for the third quarter?

The (blended) net profit margin for the S&P 500 for Q3 2022 is 12.0%, which is below the previous quarter’s net profit margin and below the year-ago net profit margin. However, it is above the 5-year average net profit margin (11.3%).

If 12.0% is the actual net profit margin for the quarter, it will mark the fifth straight quarter in which the net profit margin for the index has declined quarter-over-quarter. On the other hand, it will also mark the 7^th consecutive quarter that the net profit margin has been 12% or higher. Prior to the current streak, the net profit margin only hit 12% in one other quarter (Q3 2018) in the previous 10 years.

At the sector level, three sectors are reporting a year-over-year increase in their net profit margins in Q3 2022 compared to Q3 2021, led by the Energy (to 14.6% vs. 8.9%) sector. On the other hand, eight sectors are reporting a year-over-year decrease in their net profit margins in Q3 2022 compared to Q3 2021, led by the Financials (14.9% vs. 18.8%) sector.

Seven sectors are reporting net profit margins in Q3 2022 that are above their 5-year averages, led by the Energy (14.6% vs. 6.8%) sector. On the other hand, fours sectors are reporting net profit margins in Q3 2022 that are below their 5-year averages, led by the Financials (14.9% vs. 16.5%) sector.

Five sectors are reporting a quarter-over-quarter increase in their net profit margins in Q3 2022 compared to Q2 2022, led by the Utilities (to 16.0% vs. 12.7%) sector. On the other hand, five sectors are reporting a quarter-over-quarter decrease in their net profit margins in Q3 2022 compared to Q2 2022, led by the Materials (11.4% vs. 14.2%) sector. One sector (Industrials) is reporting no change in its net profit margin (10.1%) quarter-over-quarter.

What is driving the continuing 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 8.5% in September, which marked the 14^th straight quarter that the percentage exceeded 8.0% (year-over-year). During the previous earnings season, 412 S&P 500 companies cited “inflation” on earnings calls for the second quarter, which was the second-highest number in more than 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 8% for the seventh straight quarter.

In addition, companies are facing a difficult year-over-year comparison to unusually high net profit margins in 2021. In Q3 2021, the S&P 500 recorded the second-highest net profit margin reported by the index since FactSet began tracking this metric in 2008.

Despite continuing high inflation, it is interesting to note that analysts believe net profit margins for the S&P 500 will be higher than Q3 2022 for the rest of this year and for the first half of next year. As of today, the estimated net profit margins for Q4 2022, Q1 2023 and Q2 2023 are 12.1%, 12.3%, and 12.5%, respectively.

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