The blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings growth rate for the S&P 500 for Q1 2018 is 18.3%, and the blended revenue growth rate for the index is 7.6%.
During this earnings season, a number of companies in the S&P 500 have discussed wage increases and other rising costs during their earnings calls. Given these concerns, what is the S&P 500 reporting for a net profit margin for the first quarter?
A Look at Profit Margins
The blended net profit margin for the S&P 500 for Q1 2018 is 11.1%. If 11.1% is the actual net profit margin for the quarter, it will mark the highest net profit margin for the S&P 500 since FactSet began tracking this data in Q3 2008.
At the sector level, eight of the 10 sectors are reporting net profit margins for the first quarter that are above their 5-year averages. Three sectors are reporting their highest net profit margins since FactSet began tracking this data in Q3 2008: Financials (17.7%), Health Care (10.7%), and Materials (11.3%).
What is driving the higher net profit margins for the index? The reduction in the corporate tax rate due to the recently passed tax law is likely a significant factor, as the lower tax rate has boosted earnings for companies in the index for the quarter. Although it is important to note that net profit margins were improving on a sequential basis during all of 2017, prior to the tax bill becoming law. In any event, it appears the lower tax rate is more than offsetting any impact of higher wages and other rising costs, resulting in a record-level net profit margin for the index for the first quarter.
It is interesting to note that analysts expect even higher net profit margins for the remainder of 2018 for the S&P 500. Based on current earnings and revenues estimates, the estimated net profit margins for the second, third, and fourth quarter of 2018 are 11.5%, 11.8%, and 11.7%, respectively.
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.
John’s 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, Financial Times, The New York Times, MarketWatch, and Yahoo! Finance.