Improving profit margins among U.S. companies are supporting a stronger-than-expected earnings season even as revenues top estimates at rates below the historical long-term average, according to Goldman Sachs strategists.
With the vast majority of the S&P 500 having reported results, third-quarter margins rose to 11.6% from 11.1% in the second quarter, excluding the energy sector, according to the analysis by Goldman Sachs chief U.S. equity strategist David Kostin and his team.
Those results are 40 basis points better than what analysts expected three weeks ago, the Goldman strategists said in a note.
“Sequential quarterly improvement in profit margins represented the bright spot during 3Q earnings season,” they wrote.
S&P 500 companies are on track to have increased earnings by 6.3% in the third-quarter from the year-ago period, LSEG IBES said in a report on Friday. That is up from an estimate of a 1.6% rise on Oct 1.
At the same time, 34% of companies have topped revenue estimates, according to Goldman. That’s below the long-term average of 37% and the 47% rate of beats in the first half of 2023, Goldman said.
Goldman pointed to a “broad-based slowdown” in cash spending in the third quarter reports. Spending on capital expenditures along with research and development rose by 5% in the third quarter, down from 14% growth in the first half.
The strategists kept their full-year forecasts for overall profits at S&P 500 companies, projecting earnings per share of $224 in 2023, or 1% year-on-year growth, and $237 in 2024, or 5% growth.
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