S&P 500 Reporting YoY Decline in Net Profit Margin for 3rd Straight Qtr(Oct 21, 2019)

박재훈투영인

created At: 2/20/2025

Sell

This analysis includes a sell recommendation. Please carefully review all mentioned risk before proceeding.

133690

Mirae Asset TIGER NASDAQ100 ETF

Fact

Q3 2019: S&P 500 earnings declined -4.7% YoY, while revenues grew 2.6% YoY. The blended net profit margin is 11.3%, marking the first time since 2009 with three consecutive quarters of YoY margin declines. 9 of 11 sectors reported lower margins, led by Energy (5.4% vs. 8.1%) and Information Technology (20.6% vs. 23.0%). Key drivers of margin decline: Tough comparison to Q3 2018, which had the highest recorded margins since 2008. Rising wages, labor costs (discussed by 32% of early reporters), and raw material costs (21%). Future projections: Net profit margins of 11.1% (Q4 2019), 11.3% (Q1 2020), and 11.7% (Q2 2020), with YoY margin growth expected in Q1 2020.

Opinion

The decline in net profit margins, despite revenue growth, reflects rising cost pressures and tough YoY comparisons. The significant margin erosion in sectors like Energy and Information Technology highlights sector-specific challenges, such as volatile commodity prices and supply chain disruptions. Higher labor and input costs further compress margins, signaling broader inflationary pressures. The slight improvement expected in early 2020 suggests potential stabilization but hinges on controlling costs and boosting earnings growth.

Core Sell Point

S&P 500 net profit margins shrank in Q3 2019, driven by rising costs and tough YoY comparisons, though modest margin recovery is anticipated starting in Q1 2020.

For the third quarter, the S&P 500 is reporting a year-over-year decline in earnings of -4.7%, but year-over-year growth in revenues of 2.6%. 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 third quarter. Given this concern, what is the S&P 500 reporting for a net profit margin in the third quarter?

The blended net profit margin for the S&P 500 for Q3 2019 is 11.3%. If 11.3% is the actual net profit margin for the quarter, it will mark the first time the index has reported three straight quarters of year-over-year declines in net profit margin since Q1 2009 through Q3 2009. Nine of the 11 sectors are reporting a year-over-year decline in their net profit margins in Q3 2019, led by the Energy (5.4% vs. 8.1%) and Information Technology (20.6% vs. 23.0%) sectors.

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

One factor is a difficult year-over-year comparison. In Q3 2018, the S&P 500 reported the highest net profit margin since FactSet began tracking this data in 2008. While nine sectors are reporting a year-over-year decline in net profit margins, only one sector (Health Care) is reporting a net profit margin below its five-year average. Higher costs are likely another factor. Of the first 22 S&P 500 companies to conduct earnings calls for Q3, seven (32%) discussed a negative impact from higher wages and labor costs and five (21%) discussed a negative impact from higher raw material or other input costs. Please see our previous article on this topic.

Based on current estimates, the estimated net profit margins for Q4 2019, Q1 2020, and Q2 2020 are 11.1%, 11.3%, and 11.7%. Net profit margins are expected to increase on a year-over-year basis again in Q1 2020.

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 Q3 2019 to Q3 2018 (and all other year-over-year comparisons for historical quarters) reflect an apples-to-apples comparison of data at the company level.

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