For the third quarter, the S&P 500 is reporting a year-over-year decline in earnings of -4.7%, but year-over-year growth in revenues of 2.6%. 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 third quarter. Given this concern, what is the S&P 500 reporting for a net profit margin in the third quarter?
The blended net profit margin for the S&P 500 for Q3 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 reported three straight quarters of year-over-year declines in net profit margin since Q1 2009 through Q3 2009. Nine of the 11 sectors are reporting a year-over-year decline in their net profit margins in Q3 2019, led by the Energy (5.4% vs. 8.1%) and Information Technology (20.6% vs. 23.0%) sectors.
What is driving the year-over-year decrease in the net profit margin?
One factor is a difficult year-over-year comparison. In Q3 2018, the S&P 500 reported the highest net profit margin since FactSet began tracking this data in 2008. While nine 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 five-year average. Higher costs are likely another factor. Of the first 22 S&P 500 companies to conduct earnings calls for Q3, seven (32%) discussed a negative impact from higher wages and labor costs and five (21%) discussed a negative impact from higher raw material or other input costs. Please see our previous article on this topic.
Based on current estimates, the estimated net profit margins for Q4 2019, Q1 2020, and Q2 2020 are 11.1%, 11.3%, and 11.7%. Net profit margins are expected to increase on a year-over-year basis again in Q1 2020.
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 Q3 2019 to Q3 2018 (and all other year-over-year comparisons for historical quarters) reflect an apples-to-apples comparison of data at the company level.
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).
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