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S&P 500 Reports YOY Decline in Net Profit Margin for 4th Straight Quarter

Written by John Butters | Jan 21, 2020

For the fourth quarter, the S&P 500 is reporting a year-over-year decline in earnings of -2.1%, but year-over-year growth in revenues of 2.7%. 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 fourth quarter. Given this concern, what is the S&P 500 reporting for a net profit margin in the fourth quarter?

The blended net profit margin for the S&P 500 for Q4 2019 is 10.7%. If 10.7% is the actual net profit margin for the quarter, it will mark the first time the index has reported four straight quarters of year-over-year declines in net profit margin since Q4 2008 through Q3 2009. Eight of the 11 sectors are reporting a year-over-year decline in their net profit margins in Q4 2019, led by the Energy (4.7% vs. 7.4%), Information Technology (21.4% vs. 22.7%), and Consumer Discretionary (5.9% vs. 7.0%) sectors.

What is driving the year-over-year decrease in the net profit margin?

One factor is a difficult year-over-year comparison. In Q4 2018, the S&P 500 reported the fourth highest net profit margin (11.2%) since FactSet began tracking this data in 2008. Higher costs are likely another factor. Of the first 19 S&P 500 companies to conduct earnings calls for Q4, six (32%) discussed higher inflation and input costs and five (26%) discussed higher wages and labor costs.

Based on current estimates, the estimated net profit margins for Q1 2020 and Q2 2020 are 11.0% and 11.5%, 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. In addition, all year-over-year comparisons for Q4 2019 to Q4 2018 (and all other year-over-year comparisons for historical quarters) reflect an apples-to-apples comparison of data at the company level.