Tuesday, March 18, 2014

Goldman on Sensitivity of the S&P 500 Index to Changes in Profit Margins (A Few Basis Points Make Huge Difference)

From ValueWalk:

S&P 500 EPS sensitivity: A Few Basis Points Make Huge Difference

S&P 500 EPS sensitivity - According to new research from Goldman Sachs every 50 basis point shift is equal to $500 in S&P 500 EPS or billions of dollars. Therefore, the big question about S&P earnings is all about the margins...  
Goldman Sachs is out with a new research report on the big debate about profit margins. We will have more coverage tomorrow, but we wanted to focus on one section in particular (and we saved the best for the end of the post) – how sensitive S&P 500 EPS forecasts are to changes in profit margins. See what Amanda Sneider, CFA,  David J. Kostin, Stuart Kaiser, CFA, Ben Snider and Rima Reddy.

S&P 500 EPS (.INX) Margins: Past, Present, and Future

US corporate profitability is at record levels. A secular trend of higher margins has driven record S&P 500 earnings despite an environment of sub-trend economic growth and modest sales. During the last 30 years margins have roughly doubled, trending higher on the back of technological advances, cheaper and more productive labor, expansion to emerging markets, declining taxes and interest rates, and aggregate index sector composition that has shifted towards higher-margin industries.

S&P 500 EPS: Margins are the key reason earnings have rebounded so quickly in the recent cycle.

Net margins for the S&P 500 (ex-Financials and Utilities) hit a low of 5.9% in 2009. By 3Q 2010, margins had already returned to the previous 2Q 2007 peak of 8.3%. They continued to rise during the next year, reaching a cyclical and historical peak of 8.9% in 3Q 2011.
S&P 500 EPS

The median S&P 500 firm’s margin has been 100-150 bp above the aggregate S&P 500 margins since 4Q 2008. The top 20 firms by 2013 revenues account for one third of aggregate S&P 500 sales, yet 13 of 20 (65%) reported margins less than 5%. This compares to 17% of the other 367 ex-Financials and Utilities companies in the S&P 500.
For the past three years, trailing four-quarter margins have remained essentially flat, ranging from 8.4% to 8.9%. Firms found varying degrees of success supporting margins by adjusting pricing, costs and business mix. Some companies prioritized sales growth at the expense of margins....MORE