S&P 500 Reporting Year-Over Year Decline in Net Profit Margins For Second Straight Quarter

The market continues to be concerned about higher inflation. Consumer prices increased by 9.1% in June, which was the largest year-over-year increase since 1981. Given these concerns, what is the S&P 500 reporting for a net profit margin for the second quarter?

Net Profit Margins Falling But Still Above the Five-Year Average

The (blended) net profit margin for the S&P 500 for Q2 2022 is 12.4%, which is below the estimate of 12.7% at the start of the quarter (March 31) and below the year-ago net profit margin of 13%. However, it is above the five-year average net profit margin of 11.2% and slightly above the previous quarter’s net profit margin of 12.3%.

If 12.4% is the actual net profit margin for the quarter, it will mark the second straight quarter in which the net profit margin for the index has declined year-over-year. On the other hand, it will also tie the mark with Q4 2021 for the fourth-highest net profit margin reported by the index since FactSet began tracking this metric in 2008.

At the sector level, two sectors are reporting (or are expected to report) a year-over-year increase in their net profit margins in Q2 2022 compared to Q2 2021: Energy (15.6% vs. 6.5%) and Industrials (9.8% vs. 9.0%). On the other hand, nine sectors are reporting (or are expected to report) a year-over-year decrease in their net profit margins in Q2 2022 compared to Q2 2021, led by the Financials (16.1% vs. 21.9%) sector.

What is Driving the Year-Over-Year Decline in Net Profit Margins?

Higher costs are likely having a negative impact on net profit margins. Producer prices increased by 11.3% in June, near the record 11.6% increase registered in March 2022. During the previous earnings season, 417 S&P 500 companies cited “inflation” on earnings calls for the first quarter, which was the highest number in more than 10 years. However, companies are also raising prices to offset these higher costs, as the S&P 500 is projected to report revenue growth above 10% for the sixth straight quarter.

In addition, companies are facing a difficult year-over-year comparison to unusually high net profit margins in the year-ago quarter. In Q2 2021, the S&P 500 recorded a net profit margin of 13%, which is the highest net profit margin reported by the index since FactSet began tracking this metric in 2008.

Despite continuing high inflation, it is interesting to note that analysts believe net profit margins for the S&P 500 will be higher than Q2 2022 for the rest of this year. As of today, the estimated net profit margins for Q3 2022 and Q4 2022 are 12.9% and 12.7%, respectively.

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