S&P 500 net profit margin set to decline for third straight quarter

The market remains concerned about rising inflation. Consumer prices rose 8.5% in March, the largest year-over-year increase since 1981. Given these concerns, what does the S&P 500 report for a net profit margin for the first trimester ?

Net profit margin down, but still above average

The S&P 500 net profit margin (combined) for the first quarter of 2022 is 12.1%, which is lower than the estimate of 12.3% at the start of the quarter (December 31). It is also lower than the net profit margin of 12.8% a year ago and lower than the net profit margin of 12.4% the previous quarter. However, it is higher than the five-year average net profit margin of 11.2%.

If 12.1% is the actual net profit margin for the quarter, this will be the third consecutive quarter in which the index’s net profit margin has declined. On the other hand, it will also mark the fifth highest net profit margin reported by the index since FactSet began tracking this metric in 2008, after only the previous four quarters.

At the sector level, four sectors report (or are expected to report) a year-over-year increase in their net profit margins in the first quarter of 2022 compared to the first quarter of 2021, led by the energy sector (11.1 % versus 4.6%). On the other hand, seven sectors report (or are expected to report) a year-over-year decrease in their net profit margins in the first quarter of 2022 compared to the first quarter of 2021, led by the financial services sector (17.2 % versus 22.7%).

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Negative impact of higher costs

What explains the decline in net profit margins of the S&P 500? Higher costs likely have a negative impact on net profit margins. Producer prices rose 11.2% in March, the largest year-over-year increase on record. In the previous earnings season, 356 S&P 500 companies cited “inflation” on fourth-quarter earnings calls, which was the highest number in at least 10 years. However, companies are also raising prices to offset these higher costs, as the S&P 500 is expected to post double-digit revenue growth for the fifth consecutive quarter.

Interestingly, analysts estimate that S&P 500 net profit margins will be higher than Q1 2022 for the rest of the year. To date, estimated net profit margins for Q2 2022, Q3 2022 and Q4 2022 are 12.7%, 13.1% and 12.8% respectively.

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