These charts show why stocks keep rallying. Profit margins are highest on record
S&P 500 companies are keeping more profit from every dollar in sales than ever before, providing another tailwind for stocks. The S&P 500's blended net profit margin is running at 16.9% for the second quarter, up from 14.8% in the first quarter and 12.9% a year ago.
Intelligence analysis by Llama
The S&P 500's net profit margin is running at 16.9%, on pace for the highest since FactSet began tracking the metric in 2009. Alphabet and Amazon are the largest contributors to the S&P 500's net profit margin.
Imagine you have a lemonade stand. If you can sell lemonade for $1 and it costs you 10 cents to make, you make 90 cents profit. But if you can sell lemonade for $1 and it costs you 5 cents to make, you make 95 cents profit. That's basically what's happening with companies right now - they're making more profit from every dollar in sales than ever before.
Analysis
Record-High Profit Margins
The S&P 500's blended net profit margin is running at 16.9% for the second quarter, which is up from 14.8% in the first quarter and 12.9% a year ago. This is the highest net profit margin since FactSet began tracking the metric in 2009. The high profit margins are providing another tailwind for stocks, which could lead to further market gains.
Alphabet and Amazon's Contribution
Alphabet and Amazon are the largest contributors to the S&P 500's net profit margin. Alphabet reported operating margin of 34% in the second quarter, up from 32% a year earlier. The Google parent also posted a $98 billion gain in other income, primarily from unrealized gains on equity securities. Amazon recorded other income of $53.4 billion on a net basis largely tied to its investment in Anthropic. The e-commerce and cloud giant also posted operating margin of 13.7% in the second quarter, up from 11.4% a year ago.
Sector-Level Improvements
Even after excluding Alphabet and Amazon, the S&P 500 margin still looks impressive at 15%, which is also a record and marks the highest net profit margin reported by the index dating back to 2009. At sector levels, margins have been improving across most of the market. Eight of the 11 S&P 500 sectors are reporting higher margins than they did a year ago, led by technology, communication services, consumer discretionary and energy.
Key points
- The S&P 500's blended net profit margin is running at 16.9% for the second quarter.
- Alphabet and Amazon are the largest contributors to the S&P 500's net profit margin.
- Even after excluding Alphabet and Amazon, the S&P 500 margin still looks impressive at 15%.
- Eight of the 11 S&P 500 sectors are reporting higher margins than they did a year ago.
- Technology, communication services, consumer discretionary and energy are leading the sector-level improvements.
If this trend continues, companies may be able to maintain high profit margins, leading to further market gains.
However, businesses in the tech sector are also experiencing a lot of competitive pressure, which could mean a potential risk in the future to profit margins in the technology space.
