WASHINGTON—Profit margins of S&P 500 companies have soared to their highest level in a decade, as businesses start to see the effects of U.S. tax reform.
The blended year-on-year earnings growth rate for the index in the quarter was 24.6 percent. That’s the index’s second-highest growth rate since the third quarter of 2010.
“It is interesting to note that analysts expect even higher net profit margins for the remainder of 2018,” Butters said.
In the second quarter, all sectors reported growth in earnings, while 10 of 11 sectors recorded double-digit growth, led by energy, materials, and information technology sectors. Energy companies reported the highest year-on-year earnings growth at 125 percent.
The unusually high earnings growth in the energy category was driven by a combination of factors, including high oil prices and a comparison to unusually low earnings recorded a year ago, FactSet said. The average price of oil in the second quarter was 41 percent higher than the price of oil during the same period last year.
The blended year-on-year revenue growth rate for the S&P 500 for the quarter was almost 10 percent. And the sales growth rate was 13.5 percent for the companies that generate more than half of their sales outside the United States.
US Stocks Outperform Foreign Stocks
The U.S. stock market got another boost from President Donald Trump’s “America First” policies in recent months. American stocks have substantially outperformed foreign stocks since May, when the trade disputes between the United States and other trading markets began to heat up.Strong earnings growth will continue at almost 20 percent through the remainder of the year, according to analysts. However, it will start to come down in the first half of 2019, they estimate.
In addition, a record level of companies surprised analysts in the quarter by reporting earnings that topped estimates.
According to FactSet, 79 percent of S&P companies reported actual earnings per share (EPS) above the mean EPS estimate by analysts, the highest since 2008. In aggregate, earnings beat expectations by 5.0 percent.
The consumer discretionary category saw the largest earnings surprise, with companies such as online retailer Amazon.com, and home construction and real estate company Lennar reporting profits of more than double what analysts expected.
“Overall, the housing market has remained strong and seems to continue to strengthen,” Stuart Miller, executive chairman of Lennar, told analysts in a conference call on June 26. “There continues to be a general sense of optimism in the market. Unemployment is at historic lows.”
On July 26, Amazon CFO Brian Olsavsky commented on the company’s strong results. He said in a conference call that the company’s high-margin businesses, like cloud computing and advertising, were significant contributors to the profit growth.
And on revenues, financial companies reported the largest positive surprise. U.S. banks, in particular, benefited from strong consumer sentiment in the quarter, reporting higher revenues than expected.
JPMorgan CEO Jamie Dimon said in a statement that “the healthy U.S. consumer” helped drive double-digit growth in the bank’s credit-card and money-management businesses.
“We see good global economic growth, particularly in the United States, where consumer and business sentiment is high,” he stated.
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