Corporate profitability set to weaken - JPMorgan

February 26, 2024 5:57 AM EST - The benchmark S&P 500 index closed at a record high on Wall Street Friday, but sentiment could quickly turn as corporate profit margins appear to be peaking, according to analysts at JPMorgan.

Equities appear to be in demand because investors expect corporate profits to accelerate, supported by the bottoming out in activity indicators that is now in progress, analysts at the U.S. bank noted.

“However, the earnings reality might turn out to be the opposite as we move through the year. In aggregate, corporate profit margins are elevated in a historical context, and appear to be peaking out,” according to JPMorgan, in a note dated Feb. 26.

The bank sees a number of reasons why profit margins could fall from current levels.

Firstly, many companies locked in low cost of financing through extending the duration of their debt, while the rise in interest rates resulted in an improving return on their cash balances. This development is set to normalize.

Secondly, toplines were exceptionally strong post COVID for many corporations, and pricing power was high. As nominal GDP growth rates fade, margins could weaken.

Finally, the bank noted that 2024 EPS projections keep coming down in key regions. For the S&P 500 all the profit growth in the past few quarters was due to Magnificent 7 - Microsoft (NASDAQ: MSFT), Apple (NASDAQ: AAPL), Nvidia (NASDAQ: NVDA), Amazon (NASDAQ: AMZN), Tesla (NASDAQ: TSLA), Alphabet (NASDAQ: GOOGL) and Meta Platforms (NASDAQ: META).

Away from these stocks, EPS growth for the remaining S&P 500 constituents is outright negative.

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