Goldman Sachs analysts believe the worst of the profit margin reset “is likely behind us”. The S&P 500 margins fell by over 100 basis points in the recent quarter after hitting record highs in 2021.
The slowdown has meanwhile slowed down with Q1 margins coming in above Street expectations and in line with pre-COVID levels.
“Resilient revenues, slowing input cost inflation, and a weakened USD suggest margins should stabilize in coming quarters. Our macro model points to just a 36 bp decline in the S&P 500 net margin in 2023 to 11.3%,” the analysts said in a client note.
On a more negative note, the analysts don’t see “substantial” potential for near-term margin expansion.
“Wage growth, interest rates, and inventories remain elevated. We expect just an 11 bp increase in the S&P 500 net margin in 2024, versus the bottom-up consensus estimate of 96 bp. The primary near-term downside risk to profit margins is that the economy falls into recession,” they added.
They are also cautious on the long-term margin expansion as past drivers aren’t likely to provide much of a boost in coming years.
“Without continued profit margin expansion, S&P 500 returns risk falling below the long-term trend.”
However, the surge in the use of artificial intelligence (AI) tools could prove to be “the biggest potential long-term support for profit margins.”
“Our economists' productivity estimates suggest AI could boost net margins by nearly 400 bp over a decade. But uncertainty around both the eventual economic impact of AI and the regulatory response it may elicit is high,” Goldman analysts concluded.