Falling Profit Margins Raise Alarm, a Precursor to Layoffs & Recession

  • Wall Street is on the look out for margin pressures from rising labor costs, trade wars and falling oil prices, as a sharp drop in margins is an early warning signal for a recession.
  • But while there is deterioration, analysts see flattish margins this quarter and no signs of recession.
  • However, some strategists say stagnant margins hold back corporate profits — and potentially stock market gains.
  • Tech, communications services and energy are among the areas most impacted by contracting margins.

As corporate earnings reports roll in, analysts are keeping a close eye on profit margins as a possible early warning signal for the markets and economy.

Profit margins are showing some signs of contraction, but Ned Davis Research analysts say there’s no broad deterioration yet, and they expect margins to be flattish. But the analysts do note that “stagnating margins are an obstacle in the way of accelerating earnings growth, something likely needed for a year-end rally.”

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Net profit margins for the third quarter are currently predicted to be 11.3% for the S&P 500, below the 11.5% of the second quarter but better than the first quarter’s 11%, according to FactSet.



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