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Corporate profit margins reach record levels even as costs rise

Data: FactSet; Chart: Axios Visuals

America’s biggest companies have managed to achieve record-high profit margins, despite rising input costs.

Why it matters: Raw materials inflation and wage hikes have had almost no noticeable effect on corporate earnings. Still, analysts warn it may just be a matter of time before those costs catch up with margins.


By the numbers: S&P 500 companies are reporting an average net profit margin — net income as a percentage of revenue — of 13.0% in the second quarter, according to data compiled by FactSet through Friday.

  • This is the highest profit margin since FactSet began tracking the metric in 2008.

What they’re saying: A lot of businesses used the past year to streamline their operations.

  • “Despite some rising costs, for many companies, margins are up because pandemic-related cost savings are being reflected on financial statements before things like wage inflation,” Saira Malik, Nuveen CIO of global equities, tells Axios.
  • In other words, companies are doing more with a lot less. This is called operating leverage, a phenomenon where expenses aren’t rising hand-in-hand with sales.
  • They’re also passing some of those costs to their customers as they’ve enjoyed “ample pricing power,” notes Lori Calvasina, RBC Capital Markets head of U.S. equity strategy.

Yes, but: These rising costs are expected to catch up to some companies.

  • “For many companies, the benefit of cost cuts during the pandemic are currently reflected on financial statements while inflation — wage inflation being a big component — will have a lagged effect on company financials,” Malik says.
  • “Therefore this margin trend will continue for those companies with future pricing power but will be diminished for those companies who are benefiting from legacy cost efficiencies.”

Zoom out: Unlike the massive corporations of the S&P 500 that are doing pretty well, small businesses have had a very different experience. According to an NFIB small business survey, more companies are reporting lower earnings than higher earnings.

  • “Small businesses have a harder time absorbing increased costs and passing them along,” Holly Wade, executive director of the NFIB’s Research Center, tells Axios.

The bottom line: Rising costs are no picnic. Bigger businesses have fared well relative to smaller businesses, but this may not last if cost inflation persists.

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U.S. warns firms operating in Xinjiang are at "high risk" of violating forced labor laws

The State Department and several other federal agencies issued an updated advisory on Tuesday warning that businesses with supply chains and investments in the Chinese province of Xinjiang run a "high risk" of violating U.S. laws on forced labor.

Why it matters: The Biden administration is moving aggressively to ensure that American businesses, many of which use supply chains deeply intertwined with the Chinese economy, are not complicit in the genocide of Uyghurs and other Muslim minorities.

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