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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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.
Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.
After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.
His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.
Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.
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