Wall Street Bulls Bolstered by Historic Corporate Profit Surge Amid High Stock Valuations
Wall Street investors are reassured by a historic rise in corporate profits despite elevated stock valuations. In the first quarter of 2024, companies in the S&P 500 index reported a net profit margin of 14.8%, the highest since FactSet began tracking this data in 2009. This surpassed the previous record of 13.2% set just one quarter earlier. The profit growth is broad-based, extending beyond technology firms to sectors like financial services and industrials, indicating increased resilience amid geopolitical tensions and inflationary pressures.
Nancy Tengler, CEO of Manulife John Hancock Investments, noted that rising productivity across many sectors, not just artificial intelligence, is driving this profit expansion, likening it to the productivity-driven growth of the 1990s. Technology companies, led by Nvidia and Micron, remain the primary contributors to profit growth, with the sector’s exclusion lowering the S&P 500’s net margin to 12.4% in Q1. However, within AI-related industries, chipmakers and infrastructure providers are seeing significant margin expansion, while hyperscale companies investing heavily in infrastructure face margin compression.
The S&P 500’s corporate earnings grew 28.8% in Q1, the strongest since late 2021, and analysts forecast a strong Q2 with an expected net margin of 14.2%, still above last year’s 12.9% and the five-year average of 12.3%. Some companies, like Apple, have raised prices to offset rising component costs, helping protect profit margins. Yet, concerns remain about the sustainability of margin expansion, especially if technology sector pricing power or demand weakens. For example, OpenAI is reportedly considering significant price cuts to compete with Anthropic.
Stock valuations remain high, with the S&P 500 trading at about 20 times expected earnings over the next 12 months, slightly above the 10-year average of 19. Profit margins could face pressure from tighter financial conditions and higher interest rates, as the Federal Reserve signaled continued commitment to price stability under new Chair Kevin Warsh. Market participants have increased the likelihood of further rate hikes by year-end. Overall, strong corporate earnings provide some confidence in the market’s ability to sustain recent sharp gains despite these risks.
