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,
Wayfair Inc.
W,
and Macy’s
M,
lay off staff. Nike Inc.
NKE,
last month said it planned to cut as much as $2 billion in expenses over the next three years.
The cuts are coming in other forms as well. Macy’s is closing stores. CVS Health
CVS,
is shuttering some pharmacies at Target Corp.
TGT,
locations. Even Walmart Inc. — to whom investors have been kinder as more customers seek out cheaper groceries — is reportedly shutting down its startup incubator.
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,
reports on Tuesday, it’ll be all about the ads, analysts suggest, as the platform’s cheaper but more advertisement-riddled viewing options show signs of paying off. And BofA analysts last week said that Netflix had “won the ‘streaming wars,’” as rivals consolidate, lean on their own ad-tiered services, cut spending on new shows and films, or otherwise rethink their approach to streaming following last year’s strikes in Hollywood.
“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,
meanwhile, reports results on Wednesday. The automaker faces no shortage of questions ahead of the results: Namely, its profit trajectory, after cutting prices on its cars to spur demand; higher interest rates and concerns over slower EV adoption; whatever’s happening in China’s economy; whatever’s happening with plans to make a cheaper vehicle currently referred to the “Model 2“; the degree of control over the company that Elon Musk will be happy with.
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,
3M
MMM,
International Business Machines Corp.
IBM,
and Intel Corp.
INTC,
Results are also due from rail operators CSX Corp.
CSX,
Union Pacific Corp.
UNP,
as retailers navigating an uncertain economy try to stay prudent with the products they order, which affects what gets shipped on railroads and by trucks. Norfolk Southern Corp.
NSC,
also reports, after one of its trains derailed in Ohio last year and led to bigger questions about its safety protocols. And a number of defense contractors — Lockheed Martin Corp.
LMT,
RTX Corp.
RTX,
General Dynamics Corp.
GD,
and Northrop Grumman Corp.
NOC,
— report amid deepening conflicts in Ukraine and the Middle East.
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,
and Spirit Airlines Inc.
SAVE,
to fight a federal judge’s ruling blocking a planned merger between the two. The airlines reporting results this week could talk about both issues, and how they might affect air travel, competition, and what passengers pay to fly in an industry already largely controlled by only four carriers.
Alaska Air Group
ALK,
— the airline whose Boeing 737 Max 9 jet suffered a window blowout this month, leading the government to ground 171 Max 9s — reports results on Thursday. United Airlines
UAL,
reports earlier in the week, on Monday. Both airlines operate dozens of Max 9s, and could offer more context on the impact to their flight networks and bottom lines.
Those results, as well as earnings reports during the week from Southwest Airlines Co.
LUV,
and American Airlines
AAL,
will arrive as analysts speculate on Spirit Airlines’ potentially-grim prospects as a standalone carrier, and what the court ruling means for other potential merger deals in the airline industry. Executives could offer their sense of the travel-industry dynamics for the year ahead, as revenge travel fades and the courts decide on the number of airlines that consumers can ultimately choose from.
The numbers to watch
Visa, Capital One, American Express: In the fourth quarter, credit-card provider Discover Financial Services
DFS,
set aside an extra $1 billion to brace for the possibility of consumers falling behind on bill payments. Wells Fargo & Co.’s
WFC,
own provision for credit losses jumped 34%, amid caution over the state of credit card-holders and the commercial real estate industry. When Visa Inc.
V,
and Capital One Financial Corp.
COF,
report results on Thursday, followed by American Express Co.
AXP,
on Friday, the results will offer more color on a cautious consumer.
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