America’s profits dwindle

The strength of the dollar and the low oil price have begun to weigh on the earnings of American companies.

764-SP-500-634

One problem remains the strength of the US dollar. The dollar index, which tracks the greenback's progress against a basket of its major trading partners' currencies, hit a 12-year high in March. It has traded sideways since, but unless it weakens significantly, it will continue to squeeze US company earnings, says John Authers in the Financial Times. S&P 500 firms make around half their sales abroad.

Meanwhile, the energy sector, which accounts for around 8% of the index, is dragging overall earnings down as the oil price slides. The sector's profits are set to have fallen by an annualised 65% in the third quarter. The slowdown in China and emerging markets is another hurdle.But a new problem is falling profit margins, say Saumya Vaishampayan and Corrie Driebusch in The Wall Street Journal.

Since the crisis, companies have slashed costs, put off investment in infrastructure and borrowed at historically low rates. "The upshot was several quarters of higher profits, even as sales stagnated." The "bumpy, below-par and brittle" recovery, as Morgan Stanley puts it, has kept a lid on sales growth. Now "the margin story is crucially important to the earnings outlook because we're not expecting a ton of revenue growth", says Matthew Peron of Northern Trust.

That's something of an understatement: we're not actually expecting any revenue growth. Sales are projected to fall by 4% year-on-year. There's also a limit to how much profit growth firms can squeeze out of tepid sales and we've probably reached it. Margins earnings as a share of sales reached a record 10.5% for the S&P 500 in the second quarter and are on their way back down. The index's margin will fall to 10.1%, analysts reckon.

Dwindling margins don't exactly "bode well for justifying where price/earnings multiples are today", as James Abate of Centre Funds notes. Pricey stocks and falling earnings are an unappealing mix.

Recommended

Federal Reserve raises interest rates by 0.5%
US Economy

Federal Reserve raises interest rates by 0.5%

The latest hike by the Federal Reserve takes the US benchmark rate to 4.25% - 4.5%.
15 Dec 2022
US stimulus checks – will you get one?
US Economy

US stimulus checks – will you get one?

To help fight high inflation and financial hardships, some US states have started to send stimulus checks to support residents. Here’s what you need t…
14 Nov 2022
US inflation drops to 7.7%
US Economy

US inflation drops to 7.7%

Costs for rents increased, but the price of cars, clothes and medical care helped slow the rate of inflation in the US
11 Nov 2022
Federal Reserve hikes interest rates to 4%
US Economy

Federal Reserve hikes interest rates to 4%

The Federal Reserve continues its battle with inflation with another bumper interest rate hike.
3 Nov 2022

Most Popular

House prices could fall 30%. Should investors be worried about a repeat of 2008?
Investments

House prices could fall 30%. Should investors be worried about a repeat of 2008?

Some analysts are predicting that house prices could fall as much as 30%, which, when compared to the fact that prices have jumped 28% since April 201…
24 Jan 2023
When will interest rates go up?
UK Economy

When will interest rates go up?

New interest rates will be announced on 2 February – we look at what to expect.
26 Jan 2023
Is the State Pension triple lock doomed to fail?
Pensions

Is the State Pension triple lock doomed to fail?

The State Pension triple lock guarantees an increase in the state pension every year, but this assumes government income grows every year as well, whi…
25 Jan 2023