While stock markets in the US continue to trade within touching distance of record highs, it may have slipped investors’ minds that companies listed on the S&P 500 Index have mostly delivered better-than-expected earnings this quarter.
That’s been driven by big beats on the top line by a number of high-growth tech stocks. However, that hasn’t stopped their share prices getting hammered in the days after.
Some other stocks, meanwhile, have gone on to set record highs. Yet, today, there was more bad news with the possibility of an even more infectious and dangerous mutant strain of Covid-19.
That has seen stock markets in Asia sell off sharply and it looks as though that will spread to US markets when they open.
Disregarding the fear factor, though, if investors take a look at the latest earnings season, they’ll see that the majority of US companies actually beat Wall Street’s expectations.
That’s been a constant feature of the Covid-19 pandemic, when fears and “unknowns” dominated analysts’ forecasts and led to them consistently underestimate the earnings strength of US companies over the past 18 months (see below).
Earnings driven by higher margins
One factor which isn’t discussed much is how technology stocks are driving this earnings picture, primarily through rising margins.
In the first half of 2019, the net profit margin for the S&P 500 group of companies was 9.3% but by the first half of 2021 this had risen by an impressive 180 basis points to 11.1%.
A big part of that percentage increase has been down to technology stocks, which tend to have higher gross margins and improving profitability when they scale – which many more have done during the past two years.
Clearly, this margin uplift has come mainly from “Big Tech” names like Amazon.com Inc (NASDAQ: AMZN), Microsoft Corporation (NASDAQ: MSFT) and Alphabet Holdings Inc (NASDAQ: GOOGL).
It’s a subtle reminder for long-term investors that, amid all the fear of new mutant strains and the start of tapering by the US Federal Reserve, the profitability picture for many tech companies in the US still looks as bright as ever.
Source: FT.com, Factset as of November 2021
Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips owns shares of Microsoft Corporation.
