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Business 101: S&P 500 Top Companies Have High Margins

Putting yourself in the position to sell your product or service for a lot more than you paid for it has been the primary goal for businessmen for thousands of years. Today we call this concept margin, but whether you are selling handmade sandals or computer chips, the idea is the same.

A business with high margins sells products or services for significantly more than their costs, and a business with low margins sells its products or services for only slightly more than their costs to produce the goods or services. The obvious corollaries are that businesses with high margins have to sell relatively fewer products compared to low-margin businesses to have the same profits, and high-margin businesses that sell a lot of their products or services are typically highly successful.

Top 20 companies account for over 40% of S&P 500 EPS

The proof is in the pudding, however, and a recent Goldman Sachs Group Inc (NYSE:GS) report clearly illustrates the importance of margins in today’s global economy. The report points out as a headline statistic that just 20 stocks account for over 40% of earnings per share in the S&P 500. The other 480 stocks in the S&P 500 (INDEXSP:.INX) total up to just 59.1% of the total index EPS.

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To give you some perspective, these same 20 companies represent 32.2% of the total market cap of the S&P 500, and 27.1% of the total sales of the companies on the index. Oracle Corporation (NYSE:ORCL) had the highest margins at 34.5%, with QUALCOMM, Inc. (NASDAQ:QCOM) right behind at 33.4%. Apple Inc. (NASDAQ:AAPL) also ranked well, with a 25.1% top line margin. Intel Corporation (NASDAQ:INTC) was another strong performer, with net margin of 20.1%

Goldman Sachs (NYSE:GS) markets overview

Goldman Sachs Group Inc (NYSE:GS) Chief US Equity Strategist David J. Kostin also offers an overview of the current markets and their projections for the future in the report.

Kostin says the bull market in stocks is not over and he anticipates the S&P 500 (INDEXSP:.INX) will increase by 6% and top 1900 by the end of 2014. He bases his forecast on 8% growth in EPS together with a basically flat forward P/E multiple in the neighborhood of 15x. Projecting into the future, assuming growth in sales, earnings, and the economy in general will increase P/E ratios to 16x, he says the S&P 500 will reach 2100 by end of 2015 and 2200 by end 2016.