Corporate America’s Profit Machine Is as Strong as Ever

Operating margin for S&P 500 companies rebounds to near all-time highs.

You’ve likely heard that second quarter profits are surging, driven by easy year-over-year comparisons and the reopening of the economy. Lost in the hoopla over blowout earnings is how profitable America’s companies are for every dollar in revenue they take in, or the operating profit margin.

Operating profit margins in the second quarter are running at 13.9% for S&P 500 companies – rebounding to near all-time high levels and exceeding where margins were going into last year’s economic shutdown. If someone is searching for reasons why the S&P 500 continues to make all-time highs, fat profit margins and record profits are likely key parts of the argument.The rebound in operating margins reflects several trends, some related to the economic reopening while others are long-term, including:

  • Supply and demand imbalances during the economic reopening boosted the fortunes of companies involved in commodities, durable goods, and other products affected by manufacturing bottlenecks
  • Cooped up Americans decided to spend their savings and absorbed higher prices for goods and services
  • A surge in worker productivity during the shutdown has not been reversed, helping make companies more efficient 
  • The growing use of data, software, and artificial intelligence helps corporate executives profitably adjust their operations amid ever-changing circumstances
  • The S&P 500’s composition is shifting towards higher margin technology companies


The long-term trends listed above – worker productivity, tech innovation and the index’s composition – are reasons to expect the rebound in operating profit margins to last.

As those long-term trends were forming deeper roots across corporate America from 2010 to 2020, the S&P 500’s operating margin held above 12%, the longest stretch ever at such a lofty level.

Past performance is no guarantee that operating margins will remain at today’s levels, of course. Still, Horizon Investments sees the operational flexibility and strong earnings performance of American companies as a reason to tilt its strategies towards U.S. stocks currently. 

And while the news media is filled with concerns over the Delta variant and issues in the labor market, corporate America’s ability to navigate such a difficult and volatile environment doesn’t get enough air time.  Focusing on what matters for markets, instead of headline grabbing news stories, is what our dynamic, multi-disciplined investment process is designed to do.  That’s how Horizon aims to help your clients build wealth through constantly evolving market conditions.

 

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