Recession or not, Wall Street still expects inflation to produce record profit margins, with more on the way

The layoffs are piling up. The recessions are deepening. But as prices continue to rise, Wall Street expects net profit margins for the companies that make up the S&P 500 to remain at levels far above any level before the COVID-19 pandemic.

As fourth-quarter results come in, Wall Street analysts expect 2022 net profit margins — the amount of profit a company makes relative to its sales — of 12%, according to FactSet. For 2023, they expect 12.2% and 12.8% in 2024.

like MarketWatch reported previouslyS&P 500 profit margins have never been as high as 11%. They only topped 10% twice, before topping 12% in 2021, despite disruptions to the labor market and global supply chains that have forced companies to pay more for staff and freight.

Record profit margins occurred amid record inflation, suggesting that companies were taking advantage of higher prices delivered to consumers rather than trying to catch up on rising costs—a reason many executives cite for raising prices.

in depth: Corporate profit has reached a level far beyond what we’ve seen before and is expected to continue to grow

However, expectations for future profit margins are already declining, and are likely to continue to decline as early optimism gives way to more clarity on the companies’ actual financial results later on. Wall Street Annual profit margins are expected to reach 13% in 2022 early in the year. But That goal, as well as the projections for the coming years, have fallen all the time. Analysts in recent weeks have already become more pessimistic about corporate earnings per share in the first half of this year.

Higher margin expectations can also be attributed to timing, and the way past decisions to raise prices, along with more recent decisions to cut costs, land on the top and bottom line. Profits for some companies such as Boeing Aircraft Industry
and Inc. AMZN
A company big enough to determine whether the S&P 500 earnings will go up or down completely this year She is also expected to see a big comeback this year.

“Overall, many companies have been able to raise prices to offset higher costs,” said John Butters, chief earnings analyst at FactSet. “Some of these companies have discussed the lag effect where price increases take a while to catch up with cost increases, so this could be a factor.”

He noted that executives at Conagra Brands Inc. CAG
— which makes food under names like Healthy Choice and Duncan Hines — said during an earnings call this month that there was an “inherent lag between when pricing actions are executed and when we realize the benefits of those actions in our key results.” Margins hit during that window.

But management said margins enter a recovery phase as that window closes, and that “inflation is beginning to moderate in certain areas, enabling inflation-justified pricing measures to catch up with rising costs.”

See also: Investors are ‘desperate’ for a recession that forces the Fed to cut interest rates but what happens to the markets if the economy remains healthy?

Butters also noted that FedEx Corp. FDXAnd
In the meantime, it cuts costs while also Freight rates raised this year. The executives said that when the air and ground parcel delivery company reported its earnings in December Shipping volumes have been fallingbut they still extract more money from each delivery by way of additional fees.

More employees over the past three years have demanded better pay and benefits, after dealing with the stress of understaffing and the risk of exposure to COVID-19 on the job. Bosses, in turn, are becoming more anxious, struggling to attract employees who are more willing to weigh their options and deal with investor pressure to keep prices high and costs low. Labor is often one of the largest costs to a company, and many companies have raised wages or added other incentives in an effort to attract talent.

In an analysis of the 20 companies so far that have made fourth-quarter earnings calls, FactSet found that just over half cited the “negative impacts” of labor costs and a tougher FX background. In a Deloitte survey of retail executives, published Thursday, 70% said that “work was not. The first challenge is in 2023Because many positions are still vacant.

As executives reconcile those costs with a slowing economy, analyst sentiment in the first half of the year turned sharply. “Over the past few weeks, earnings forecasts for Q1 and Q2 2023 have shifted from year-over-year growth to contraction year-over-year,” the FactSet report said on Friday. However, analysts expect a recovery in the back half of the year.

This week in earnings

Twenty-six S&P 500 SPX
The companies are due to report this week. Of these, two are members of the Dow Jones Industrial Average. DJIA

United Airlines Holdings Company (UAL).
Issues earnings after the close on Tuesday, after the DAL of Delta Air Lines Inc.
gave a First quarter forecasts that disappointed investors Because it tries to manage high labor expenses. Trucking and Logistics Services JB Hunt Transportation Services Inc. JBHT
Results are announced on Wednesday, after a drop in demand for manufactured goods with cheaper shipping rates.

Netflix Inc. NFLX
reports Thursday, as it pushes ad-supported streaming and changes its financial outlook after staff cuts and a miserable year for its stock. Procter & Gamble PG
— the consumer goods giant known for products such as Bounty paper towels, Crest toothpaste and Head & Shoulders shampoos — will also report quarterly results, after price increases helped earnings last year, amid consumers turning to essentials.

procession Bank profits also continued, after rising interest rates boosted earnings from JPMorgan Chase & Co. JPMAnd
Bank of America Corp. BACAnd
Citigroup Inc
and Wells Fargo & Company WFC
Despite the slowdown in closing deals.

Among the banks mentioned on Tuesday was Morgan Stanley MS
and its competitor Goldman Sachs Group Inc. GS
Both It reported lower profits in the last quarter of the year amid a slowdown in the deal. Trading results were mixed, even as the Fed’s fight against inflation kept markets jittery.

See also: Jobs added at Morgan Stanley, Bank of America, Citi, and JPMorgan but reduced at Wells Fargo and Goldman

Silvergate Capital Corp CAnd
The bank, which handles cryptocurrency payments, also reported a $1 billion loss on Tuesday and said it “Significantly reduce its workforceAfter, after It is racing to fill the gaps in its financial resources Amidst the Cryptocurrency Run After FTX Crash. PNC Financial Services Group Inc. PNC
Wednesday reports, as does Discover Financial Services DFS.

Last week, JPMorgan CEO Jamie Dimon said the US economy was strong, but said the impact of inflation was still unclear. CFO Jeremy Barnum, during the company’s earnings call, said the company set aside $1.4 billion from reserves following changes to its financial outlook, “which now reflects a mild recession in the central case.” The company’s fixed-income business revenue rose 12% during the fourth quarter, with management saying that “high volatility led to strong customer activity.”

Call to put it on your calendar

United Airlines: United Airlines will report on the back of results from Delta, which said travel demand remains strong and that its outlook for the first quarter included “all of the labor cost increases.” Rising fuel costs, labor tensions and issues with flight management technology remain at the forefront of problems facing the industry, following the catastrophe of Southwest flight cancellations this winter and Airline workers’ demonstrations last year.

Last month, Delta and its pilots’ union reached an agreement in principle for a substantial pay increase. As other news outlets have noted, similar pay increases could spill over into the rest of the industry. After many airline workers bought returns in 2020, when the pandemic first hit, airlines found themselves short-staffed as travel returned.

numbers to watch

Netflix’s financial numbers minus subscriber expectations: Netflix said last year that it would stop providing outlook for subscriber additions starting this year — a major factor in its share price — and would focus more on profits and sales.

resolution, as MarketWatch reported on Netflix’s earnings preview on FridayIt comes as more analysts focus on the profitability of streaming platforms, amid a decline in digital ad spending and the proliferation of other online viewing options.

Netflix Earnings Preview: With no further subscription guidelines, the focus is on financial estimates

Netflix has launched a cheaper version of its streaming service with ads. But even as the digital ad market weakens, Jefferies analyst Andrew Urkowitz said in a note that Netflix and Disney+ are poised to capture the majority of connected TV ad spending. A survey of 50 top advertising buyers from Coin also found that 41% expect their largest customers to advertise on Netflix.

However, other analysts noted that Netflix was living in a post-“Squid” world. Barclays analyst Kannan Venkateshwar said the number of Netflix subscribers in the fourth quarter of last year is on pace to be well below the 4.5 million it had expected, after viewership fell from a record showing the year before for the thriller series.

Leave a Comment