CHART: 'The End Of Profit Margin Expansion'

One of the most important debates in the markets and the economy is the story of historically high corporate profit margins and where it’s headed next.

Jeff Kleintop, Chief Market Strategist of LPL Financial, lists profit margins as one of the three most important things to watch for during this earnings season (breadth of earnings growth and earnings guidance are the other two).

Here’s his discussion of profit margins from his latest Weekly Market Commentary:

The analyst consensus forecast of 3% earnings growth in the first quarter is the slowest growth rate since the recovery in earnings began in 2009. The weakness stems from the end of profit margin expansion. Analysts expect earnings to track revenue growth of about 4%.

Over much of the past few years, companies were able to post earnings growth rates that were several times the pace of revenue growth as profit margins expanded, granting more profit per dollar of sales. However, the ability to post faster earnings growth than revenue growth has faded; rising costs have contributed to slower earnings gains relative to revenue. In fact, nearly a quarter of S&P 500 companies are expected to report a year-over- year drop in earnings per share despite year-over-year revenue gains in the first quarter. Three sectors are expected to post earnings declines despite revenue growth. The most dramatic of these is the Materials sector, where 5% revenue growth is expected to accompany a -15% decline in earnings.


Photo: LPL Financial

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