Corporate Profit Margins Eroding Significantly

There is an interesting chart from Brown Brothers Harriman posted on the Marketbeat blog at the WSJ. It shows quite a dramatic slowdown in corporate profit margins thus far this quarter; indeed the worst since Q1 2010 (by a hair). I am not sure exactly what the reason for this would be as commodity prices have dropped substantially from “QE2 highs” of about a year ago, and wage pressure is almost non existent. (perversely a stronger economy could at first hurt profit margins, especially if there is a resurgent labor market – however we are nowhere near that point)

That leaves pricing power which apparently must not be as strong as assumed. These type of things don’t really matter in the midst of a “rip off your face” rally but something to keep an eye on for the future. [Keep in mind this quarter has been unusually lackluster in earnings 'beats' as well]

• S&P 500 profit margins enjoyed a strong rally from the first quarter of 2009 through mid 2011. But margins declined in the third quarter and the current reporting period is showing further erosion.
• The firm said profit margins stand at 8.23% midway through earnings season, down from the previous two quarters. Ford, Exxon Mobil and GE have all registered disappointing margins this quarter. “It is becoming clear that the S&P 500 firms are failing to maintain the profit margins reported in the recent quarters,” Thaker said.
• Unit labor costs rose by 1.2% in the final quarter of 2011 after dropping 2.1% a quarter earlier. Overall, labor costs grew in 2011 after falling during the previous two years, which could play an additional role in weighing on margins.
• “As profit margins are a mean reverting statistic, this bears watching closely,” Boockvar says.