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S&P 500 Reporting First Year-Over-Year Decline in Net Profit Margin Since 2016


By John Butters  |  April 29, 2019

For the first quarter, the S&P 500 is reporting a year-over-year decline in earnings of 2.3%, but year-over-year growth in revenues of 5.1%. 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. Given this concern, what is the S&P 500 reporting for a net profit margin in the first quarter?

The blended net profit margin for the S&P 500 for Q1 2019 is 10.9%. If 10.9% 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.

Net Profit Margins

Sector-Level Profits

Ten of the 11 sectors are reporting a year-over-year decline in their net profit margins in Q1 2019, led by the Communication Services (11.5% vs. 13.6%), Energy (4.4% vs. 6.2%), and Information Technology (20.7% vs. 22.3%) sectors. The Utilities sector (13.0% vs. 12.8%) is the only sector reporting a year-over year increase in its net profit margin.

Net Profit Margin by Sector

What is driving the decrease in net profit margins? Higher costs are likely one of the main factors. Of the first 23 S&P 500 companies to conduct earnings calls for Q1, 10 (or 43%) discussed higher wages and labor costs and 9 (39% discussed higher raw material or other input costs. You can read more about what this means in our previous article on the topic.

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 11.4%, 11.8%, and 11.6%, respectively. However, net profit margins are not expected to increase on a year-over-year basis until Q4 2019.

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.

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John Butters

Vice President, Senior Earnings Analyst, Investor Relations

Mr. John Butters is Vice President and Senior Earnings Analyst at FactSet. His weekly research report, “Earnings Insight,” provides analysis and commentary on trends in corporate earnings data for the S&P 500 including revisions to estimates, year-over-year growth, performance relative to expectations, and valuations. He is a widely used source for the media and has appeared on CNBC, Fox Business News, and the Business News Network. In addition, he has been cited by numerous print and online publications such as The Wall Street Journal, The Financial Times, The New York Times, MarketWatch, and Yahoo! Finance. Mr. Butters has over 15 years of experience in the financial services industry. Prior to FactSet in January 2011, he worked for more than 10 years at Thomson Reuters (Thomson Financial), most recently as Director of U.S. Earnings Research (2007-2010).