After higher costs and shaky consumer demand caught up with corporate America last year, Wall Street now expects corporate profit margins to rebound through the first half of 2024, as more companies resort to layoffs, technology or other cutbacks in an effort to guard the bottom line and stave off investor anxiety.
That rebound would follow a broader drift downward in margins — or the share of a company’s sales that end up as profit — since 2021, when many businesses were unable to handle a hyped-up, freshly reopened economy. But after the fourth quarter of 2023, when margins are expected to hit their lowest level since the pandemic lockdown era, they could rise again, analyst forecasts suggest, cracking the 12% barrier again by the summer, according to FactSet.
“It is interesting to note that analysts believe net profit margins for the S&P 500 will improve in the first half of 2024,” FactSet Senior Earnings Analyst John Butters said in the report.
But that uptick in profit margins would come as companies like Xerox Holdings Corp. XRX,
The cuts are coming in other forms as well. Macy’s is closing stores. CVS Health CVS,
FactSet, in a report on Friday, said it currently expected fourth-quarter profit margins for S&P 500 companies collectively to come in at 10.7%. That figure would be below the prior quarter and the same period last year. It would also be the lowest margin figure since the second quarter of 2020.
Many companies have yet to report their fourth-quarter earnings, and analyst forecasts usually fall as markets digest more results. For now, analysts see profit margins rising to 11.7% in the first quarter of this year and 12.1% in the second quarter, according to the FactSet report.
That would put margins back at levels reached in 2022. At that time, many companies were looking to offset higher employee wages and used supply shocks from Russia’s invasion of Ukraine to push through price hikes, for things like gas and groceries, onto customers and keep those prices elevated.
Since then, those price shocks have forced many shoppers to forgo spending sprees on clothing, furniture and electronics in favor of the essentials. Some economists have said that corporate profit-hoarding is a primary reason for why prices have risen and stayed high compared to pre-pandemic levels. However, others say that corporations maxed out that pricing power last year, after exhausting consumers with markups.
But even as companies might try to prop up margins, higher margins might not necessarily be good for stock prices in the long run.
This week in earnings
Meanwhile, two household names — streaming giant Netflix Inc. and electric-vehicle maker Tesla Inc. — report results during the week.
When Netflix NFLX,
“These changes (e.g., reducing content spend/output, increasing third-party licensing) have been a tacit acknowledgement that not all media companies will be able to achieve Netflix’s global reach and scale in streaming,” BofA analyst Jessica Reif Ehrlich said in a research note on Wednesday.
However, Benchmark Research analyst Matthew Harrigan remained skeptical about potential stock gains from here, saying that Netflix’s “long-term business characteristics [are] more akin to other large media companies.”
Tesla TSLA,
Either way, for the months ahead, Wells Fargo analyst Colin Langan said to brace for “growing pains.”
Tesla also paused production at a plant Germany, according to reports, citing disruptions to shipping routes due to attacks on ships in the Red Sea carried out by the Houthi militants, a group in Yemen supported by Iran. That topic could come up more in earnings calls in the weeks ahead.
More broadly, 75 S&P 500 companies are set to report during the week ahead, including 10 from the Dow, according to FactSet. They include General Electric Co. GE,
Results are also due from rail operators CSX Corp. CSX,
The calls to put on your calendar
The airlines: The airline industry this month has been upended by fresh problems with Boeing Corp.’s 737 Max jets and efforts by JetBlue Airways Corp. JBLU,
Alaska Air Group ALK,
Those results, as well as earnings reports during the week from Southwest Airlines Co. LUV,
The numbers to watch
Visa, Capital One, American Express: In the fourth quarter, credit-card provider Discover Financial Services DFS,