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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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