Margin Growth Driving U.S. Corporate Profitability: Goldman

Margin Growth Driving U.S. Corporate Profitability: Goldman

A new report from Goldman Sachs Portfolio Strategy Research highlights that U.S. corporate profitability is currently at record levels. The report argues that these record profits are largely due to continued improvement in margins — with higher margins being driven both by increased productivity from new technologies and macroeconomic factors like historically low interest and tax rates.

Corporate profitability: It’s all about margins

GS lead analyst Amanda Sneider and colleagues put the focus squarely on margins to explain the current record corporate profitability. “Higher margins drove record S&P 500 (INDEXSP:.INX) earnings despite an environment of sub-trend economic growth and modest sales. Margins are the key reason earnings have rebounded so quickly in the recent cycle. Operating margins equaled 8.9% at the end of 2013, a return to the previous peak. Looking forward, the forces that influence margins are equally balanced between upside and downside. We forecast trailing four quarter net margins will remain at peak levels in 2014 before rising to a new peak of 9.0% in 2015.”

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The report also highlights how rapidly margins have improved over the last four years. Margins for S&P 500 (INDEXSP:.INX) companies (ex-financials and utilities) dropped to 5.9% during the financial crisis in 2009. Just a year and change later in the third quarter of 2010, margins had already returned to the earlier 2Q 2007 peak of 8.3%. Margins continued to increase over the next 12 months, eventually reaching an historical peak of 8.9% in third quarter 2011.

Factors behind increasing margins

Sneider et al make it clear that the current macroeconomic environment is the primary reason behind the continued expansion in corporate margins. “Taxes and interest rates have never been more favorable for the profitability of US firms.” They point out that many firms are already taking advantage of low interest rates to increase debt in order to increase margins and that this trend is likely to continue for some time.

s&p 500 breakdown corporate profitability

The GS analysts also point to technology-created productivity increases and relatively low labor and commodity costs as factors in higher corporate margins. “S&P 500 companies lowered both cost of goods sold and selling, general & administrative expenses as a share of revenue during the last 20 years. For both COGS and SG&A, low inflation in terms of commodity inputs and labor costs have been tailwinds.”

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