Here’s an interesting graph:
That is analysts’ one-year forward estimates for S&P 500 profit margins. It’s approaching an all-time high. There has been a lot of fretting over the cooling job market and the possibility of recession. Well, Wall Street analysts expect the good times to keep rolling.
Is this realistic? The estimates are really high! By this time next year, the consensus is profit margins in the S&P 500 will be close to 13.6 per cent, a full percentage point higher than today and close to the post-pandemic peaks of 2022. Estimates are even higher in other databases — S&P Capital IQ has expected net margins of 13.8 per cent for 2025 and 14.4 per cent for 2026.
These estimates come from sellside analysts, who might be accused of professional optimism. But to date they have been reasonably accurate. Here are actual S&P profit margins compared with estimates from a year before:
The analysts, unsurprisingly, are not great at nailing the big inflections. They were very off before Covid-19, and they did not expect companies to get a margin boost in 2021. But not a bad effort overall.
Rob remembers writing about how margins were unsustainably high a decade ago (Aiden was too busy studying for the PSATs at the time to care about margins). Time proved his worries wrong, in part because high-margin tech companies are now a bigger part of the index.
That said, analysts expect profit margins to return to the levels of early 2021, when consumers were stuck at home spending excess savings online and big companies had tremendous pricing power because of supply chain snarls. This seems a bit giddy to us. As we have written before, some companies are already seeing their pricing power erode as US consumers become choosier. And the AI cost revolution, wonderful as it may be, is not going to arrive next year. Add high expectations to your list of market risks.