Profit margins continue to get fatter.
Ever since the financial crisis, corporations have managed to deliver robust profit growth by offsetting the drag of weak sales growth with widening profit margins. These fatter profit margins come from cutting costs, which usually means getting more productivity out of a fewer number of workers.
Some market watchers have warned that there aren’t any more costs to be cut. But during their Q2 earnings announcements and conference calls, corporate America confirmed otherwise.
“S&P 500 margins expanded to a new historical high of 9.1%,” said Goldman Sachs’ David Kostin. “Margins exited the 50 bp range between 8.4% and 8.9% for the first time in four years. Trailing four-quarter margins expanded by 17 bp versus 1Q 2014. The Information Technology and Health Care sectors were the largest contributors to index level margin expansion. Margins declined for only one sector, Energy, while Consumer Discretionary margins were unchanged.”
And that’s not all. Based on the analysts’ forecasts of S&P 500 companies, those profit margins will average 9.3% for the year and then jump t0 10.0% in 2015.
Kostin, however, warns that those margin increases won’t come easily.
“Inflation remains a key concern for management,” he wrote in an August 7 note. “Companies noted the potential long- term impact of rising costs on margins despite hedges that reduce the near-term impact on profits. Firms in the consumer sectors have already experienced inflationary pressures due to rising input costs. Conflicting opinions exist as to whether boosting prices on the consumer will help mitigate the effect of rising costs.”
We’ll have to wait and see if and when margins turn.
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