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

Brian Pellegrini: why America isn't going back to work
Economy

Brian Pellegrini: why America isn't going back to work

Brian Pellegrini, founder of Intertemporal Economics, talks to Merryn about the post pandemic economy; why Americans aren't returning to work; plus in…
22 Jul 2021
US inflation spiked in June. Can this really still be transitory?
US Economy

US inflation spiked in June. Can this really still be transitory?

US inflation spiked unexpectedly in June, raising the prospect that this isn't just a transitory post-pandemic phenomenon. Saloni Sardana looks behind…
13 Jul 2021
Here’s why investors were happy with Friday’s US employment data
US Economy

Here’s why investors were happy with Friday’s US employment data

The US economy added 850,000 jobs in June, beating expectations. John Stepek breaks down why inflation expectations fell after the report despite the …
5 Jul 2021
“Zombie companies” may do little harm to the US economy
US Economy

“Zombie companies” may do little harm to the US economy

Fears that the US is being overrun by corporate zombies may be exaggerated.
2 Jul 2021

Most Popular

Why the UK's 2.5% inflation is a big deal
Inflation

Why the UK's 2.5% inflation is a big deal

After years of inflation being a financial-assets problem, it is now an “ordinary things” problem too, says Merryn Somerset Webb. But central banks st…
16 Jul 2021
The MoneyWeek Podcast: Asia, financial repression and the nature of capitalism
Economy

The MoneyWeek Podcast: Asia, financial repression and the nature of capitalism

Russell Napier talks to Merryn about financial repression – or "stealing money from old people slowly" – plus how Asian capitalism is taking over in t…
16 Jul 2021
Three companies that are reaping the rewards of investment
Share tips

Three companies that are reaping the rewards of investment

Professional investor Edward Wielechowski of the Odyssean Investment Trust highlights three stocks that have have invested well – and are able to deal…
19 Jul 2021