S&P 500 Reporting First Sequential Improvement in Net Profit Margin Since Q2 2019

For the third quarter, the S&P 500 is reporting a year-over-year decline in earnings of -18.4% and a year-over-year decline in revenues of -3.3%. Given the substantial decrease in earnings, what is the S&P 500 reporting for a net profit margin in the third quarter?

The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) net profit margin for the S&P 500 for Q3 2020 is 9.7%, which is below the five-year average of 10.5%. If 9.7% is the actual net profit margin for the quarter, it will mark the first sequential improvement in the net profit margin since Q2 2019. However, it will also mark the third lowest net profit margin reported by the index since Q1 2016 (9.4%), trailing only Q1 2020 (9.3%) and Q2 2020 (8.6%).

At the sector level, six sectors are reporting (or are projected to report) net profit margins that are below their five-year averages, led by the Industrials (4.7% vs. 8.6%) sector. However, five sectors are reporting (or are projected to report) a sequential improvement in their net profit margins in Q3 2020 compared to Q2 2020, led by the Financials (15.2% vs. 8.6%), Industrials (4.7% vs. 2.1%), and Consumer Discretionary (5.0% vs, 2.7%) sectors. It should be noted that the Energy sector is predicted to report a loss for the quarter (and reported a loss in the previous quarter), so a net profit margin can’t be calculated for this sector (due to negative earnings). For this analysis, the Energy sector is counted as reporting a net profit margin below its five-year average net profit margin due to the expected loss.

Analysts do believe net profit margins will continue to improve on a sequential basis after the third quarter. Based on current estimates, the estimated net profit margins for Q4 2020, Q1 2021, and Q2 2021 are 9.8%, 10.4%, and 11.0%. However, analysts are not projecting year-over-year improvement in net profit margins until Q1 2021.

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