Fattening Profit Margins Continue To Be The Dominant Driver Of Earnings Growth

Earnings season is under way, and one theme is clear: fat profit margins are driving earnings growth.

“[T]he majority of earnings growth we have observed so far this quarter has been a function of margins, as companies continue to operate with as few expenses as possible,” write analysts at JP Morgan Asset management.

Ever since the financial crisis, sales growth has been weak. However, corporations have been able to deliver robust earnings growth by fattening profit margins. Much of this has been done by laying off workers and squeezing more productivity out of those on the payroll.

“With earnings growth (5.5%) rising at a faster rate than revenue growth (3.0%) in Q2 and in future quarters, companies have continued to discuss cost-cutting initiatives to maintain earnings growth rates and profit margins,” said FactSet’s John Butters on Friday.

But with profit margins near record-highs, many agree that we’re do for at least some pull back.

“Looking forward, however, it is not clear that margins can continue to materially increase, meaning that the baton will need to be passed to revenues in order for earnings to continue pushing higher over the coming quarters,” said JPM.

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