S&P 500 Reporting A Lower Net Profit Margin For 6th Straight Quarter

The market continues to be concerned about higher inflation. Consumer prices increased by 6.5% in December. Although the number has been falling in recent months, it still marked the 15th consecutive month in which the percentage exceeded 6% (year-over-year). Given these concerns, what is the S&P 500 reporting for a net profit margin for the fourth quarter?

The (blended) net profit margin for the S&P 500 for Q4 2022 is 11.4%, which is below the previous quarter’s net profit margin of 11.9% and below the year-ago net profit margin of 12.4%. However, it is equal to the 5-year average net profit margin (11.4%).

If 11.4% is the actual net profit margin for the quarter, it will mark the sixth straight quarter in which the net profit margin for the index has declined quarter-over-quarter. It will also mark the lowest net profit margin reported by the index since Q4 2020 (10.9%).

At the sector level, four sectors are reporting a year-over-year increase in their net profit margins in Q4 2022 compared to Q4 2021, led by the Energy sector (to 13.4% vs. 9.3%). On the other hand, seven sectors are reporting a year-over-year decrease in their net profit margins in Q4 2022 compared to Q4 2021, led by the Materials sector (10.1% vs. 13.2%) and Financials sector (15.5% vs. 18.5%).

Four sectors are reporting net profit margins in Q4 2022 that are above their 5-year averages, led by the Energy sector (13.4% vs. 7.4%). On the other hand, seven sectors are reporting net profit margins in Q4 2022 that are below their 5-year averages, led by the Communication Services sector (9.6% vs. 11.7%).

Only two sectors are reporting a quarter-over-quarter increase in their net profit margins in Q4 2022 compared to Q3 2022, led by the Financials sector (to 15.5% vs. 14.2%). On the other hand, seven sectors are reporting a quarter-over-quarter decrease in their net profit margins in Q4 2022 compared to Q3 2022, led by the Real Estate sector (35.1% vs. 37.7%). Two sectors (Communication Services and Information Technology) are reporting no change in net profit margins 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 6.2% in December. Again, although the number has been falling over the past several months, the percentage has exceeded 6.0% (year-over-year) for 21 straight months. During the previous earnings season, 402 S&P 500 companies cited “inflation” on earnings calls for the third quarter, which was the third-highest number in more than 10 years. Companies may be having more difficulty raising prices to offset higher costs, as the S&P 500 is reporting its lowest revenue growth for Q4 2022 (3.7%) since Q4 2020 (3.2%).

In addition, companies are facing a difficult year-over-year comparison to unusually high net profit margins in 2021. In Q4 2021, the S&P 500 recorded the fourth-highest net profit margin (12.4%) reported by the index since FactSet began tracking this metric in 2008.

It is interesting to note that analysts believe net profit margins for the S&P 500 will be higher going forward. As of today, the estimated net profit margins for Q1 2023, Q2 2023, Q3 2023, and Q4 2023 are 11.9%, 12.1%, 12.3%, and 12.2%, respectively.

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