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U.S. Market Q1: Majority Of Sectors Show Margin Contraction

ByThe National Bank of Canada
Published 05/01/2012, 01:25 AM
Updated 05/14/2017, 06:45 AM
IFNC
-0.86%

The Q1 2012 earnings season has so far been relatively positive with 72% of S&P 500 constituents recording better than expected earnings results. The blended earnings growth stands at 7.1% with sales growth recording a 5% expansion. These results suggest that the S&P 500 index continues to experience profit margin expansion in this first quarter of the calendar year - in turn challenging our view that operating profit margins will crest in 2012.

However, the outcome was not widespread. In Q1 only 4 of 10 sectors experienced a margin expansion with Financials and I.T. leading the way. These two sectors alone represent over 38% of earnings for the index in Q1 and so are having a significant impact on overall index results. Today’s Hot Charts shows that S&P 500 margins when excluding I.T. & financial stocks are already showing signs of possible cresting.

As we look ahead into Q2, 31 S&P 500 companies have already given negative EPS guidance while 10 provided a positive EPS preannouncement resulting in a negative to positive ratio of 3.1. This is not only way above that seen at the same point in time one-year ago (1.3) but marks the fourth consecutive quarter where the ratio is above the long-term mean (2.3). Even if I.T. and financials do support index margins over the next couple quarters, there may be an increasing number of index constituents experiencing slower EPS growth due to margin compression.
U.S Majority of sectors show margin contraction in Q1

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