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America’s profits dwindle
The strength of the dollar and the low oil price have begun to weigh on the earnings of American companies.
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.
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
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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.
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