As the third-quarter earnings season draws to a close, the results are turning out to have been better than what was expected just one month ago (they essentially have met the analysts’ expectations from the start of the quarter). Chart 1 shows the progression of these EPS estimates for the S&P 500 per quarter for this year through to the fourth quarter 2018. The first and second quarters of this year show similar patterns—a large dip as we enter the quarter and expectations are heavily downgraded, followed by a strong pickup as the quarter ends and results are reported. The continued strength suggests that companies do not seem overly subjected to the squeezes on profit margins that one would normally expect at this point in the economic cycle, when labour markets are tight and compensation costs should be starting to bite. In this week’s Economics Weekly we dig a little deeper under the surface of these sustained profit margins, as well as look at the tax rates and compensation costs that companies face at the industry level. We use the recently updated data from the Bureau of Economic Analysis (BEA) for all U.S. corporations to get a sense of which industries have been driving margins and how that might have been achieved.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.