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.
This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.