FactSet Insight - Commentary and research from our desk to yours

S&P 500 Reporting Year-Over-Year Decline in Net Profit Margin for Second Straight Quarter

Written by John Butters | Jul 19, 2019

For the second quarter, the S&P 500 is reporting a year-over-year decline in earnings of -1.9%, but year-over-year growth in revenues of 3.8%. 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 second quarter. Given this concern, what is the S&P 500 reporting for a net profit margin in the second quarter?

The blended net profit margin for the S&P 500 for Q2 2019 is 11.3%. If 11.3% is the actual net profit margin for the quarter, it will mark the first time the index has report two straight quarters of year-over-year declines in net profit margin since Q1 2016 and Q2 2016. Ten of the 11 sectors are reporting a year-over-year decline in their net profit margins in Q2 2019, led by the Information Technology (20.6% vs. 22.7%) sector.

What is Driving the Year-over-Year Decrease in the Net Profit Margin?

One factor is a difficult year-over-year comparison. In Q2 2018, the S&P 500 reported the second highest net profit margin since FactSet began tracking this data in 2008. While ten sectors are reporting a year-over-year decline in net profit margins, only one sector (Health Care) is reporting a net profit margin below its 5-year average. Higher costs are likely another factor. Of the first 22 S&P 500 companies to conduct earnings calls for Q2, 7 (or 32%) discussed a negative impact from higher wages and labor costs and 7 (or 32%) discussed a negative impact from higher raw material or other input costs. 

It is interesting to note that analysts expect the index to report slightly higher net profit margins in the second half of 2019. Based on current estimates, the estimated net profit margins for Q3 2019 and Q4 2019 are 11.6% and 11.4%. 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 Q2 2019 to Q2 2018 reflect an apples-to-apples comparison of data at the company level.