01/25/2021 | News release | Distributed by Public on 01/25/2021 09:00
By John Butters| January 25, 2021
For the fourth 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 0.7%. Given the dichotomy between growth in earnings and revenues, what is the S&P 500 reporting for a net profit margin in the fourth quarter?
The blended (combines actual results for companies that have reported and estimated results for companies that have yet to report) net profit margin for the S&P 500 for Q4 2020 is 10.3%, which is below the five-year average of 10.5% and below the year-ago net profit margin of 10.9%. However, if 10.3% is the actual net profit margin for the quarter, it will mark the first time the index has reported a net profit margin above 10% for two consecutive quarters since Q3 2019 and Q4 2019.
At the sector level, six sectors are reporting (or are projected to report) net profit margins that are below their five-year averages, led by the Industrials (6.2% vs. 8.4%) and Utilities (10.4% vs. 12.5%) sectors. Eight sectors are reporting (or are projected to report) a year-over-year decline in their net profit margins in Q4 2020 compared to Q4 2019, led by the Industrials (6.2% vs. 8.6%) and Communication Services (10.2% vs, 12.3%) sectors. It should be noted that the Energy sector is predicted to report a loss for the quarter, so a net profit margin can't be calculated for this sector (due to negative earnings). For this analysis, the Energy sector is counted as reporting a net profit margin below its five-year average net profit margin and below its year-ago net profit margin due to the expected loss.
It should be noted the net profit margin for Q3 2020 increased significantly during the third quarter earnings season due to the unusually high number and magnitude of positive EPS surprises reported by S&P 500 companies. Just before the start of the Q3 earnings season (October 10), the estimated net profit margin for Q3 2020 was 9.4%. At the end of the Q3 earnings season, the actual net profit margin for Q3 2020 was 10.9%. If companies in the index repeat the strong performance of Q3 relative to earnings estimates in Q4, the net profit margin for Q4 2020 could see a similar increase. As of today, only 13% of S&P 500 companies have reported actual results for Q4.
Analysts also believe net profit margins will continue to be 10% or higher going forward. As of today, the estimated net profit margins for Q1 2021, Q2 2021, and Q3 2021 are 10.6%, 11.1%, and 11.6%, respectively. Analysts also are projecting year-over-year improvement in net profit margins starting in Q1 2021.
Listen to Earnings Insight on the go! In our weekly Earnings Insight podcast, John Butters provides an update on S&P 500 corporate earnings and related topics based on his popular Earnings Insight publication. The podcast is made available every Monday-listen on Apple podcasts, Spotify, or factset.com.