S&P Profit Margins Have Now Peaked
Well, technically they peaked some time ago (contrary to mainstream media propaganda), but we were waiting for another quarter to confirm our findings. For the sake of recreating our results, courtesy of CapitalIQ, we ran an analysis for all S&P 500 companies excluding companies that belong to the S&P Financials Sector Index, ending up with a universe of 418 companies. Then we looked at the last 3 years of gross profit margins on a quarterly basis (13 data points), and did a simple average, simple median, and trimmed mean (excluding top and bottom 15%), and got the following result.
As is obvious, the trimmed mean (probably the best data indicator) has now declined for 4 quarters in a row, the simple average has been in a steady decline for 6 quarters after peaking at 43% in Q4 2009, and the median is practically in free fall and is now back to the summer of 2009 levels.
The take home observation is that regardless of how they are observed, corporate margins have now peaked, and any additional headcuts at the corporate level will be cutting straight into the muscle, leading to even further profitability deterioration. That the margin drop started well before the current quarter confirms that this is far more than just a commodity price inflation phenomenon (although it certainly does not help). The only possibility for bottom line corporate growth going forward is therefore revenue growth in order to grow absolute profitability (as margins are flat or drop), which will come from either economic growth or capex spending: the first of which has been purely artificial courtesy of limited monetary and fiscal stimulus, and the second has barely budged from multi-decade lows.
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