Breakingviews: U.S. profit margins won’t get any better than this

It’s going to be a bumper year for U.S. profit margins. Big companies are enjoying booming sales, keeping a lid on the costs they control and exerting pricing power. A stellar 2021 will, however, be hard to beat.

Goldman Sachs analysts expect the net profit margin for the S&P 500 Index, excluding financials and utilities and using adjusted earnings, will be 11.5% in 2021. They say the post-recession margin rebound will equal the fastest in five decades. Optimism is understandable given a stunning results season. With only a handful of S&P 500 companies left to report, first-quarter earnings are up 53% from a year earlier and analysts expect the year-on-year growth rate for the second quarter to surpass 60%, according to Refinitiv.

Earnings usually rebound faster than revenue when economies recover because some costs are fixed. Companies accentuate the phenomenon by keeping a lid on expenses even as sales pick up, an effect that’s turbo-charged this time. Covid-19 forced many businesses to cut costs across the board, and even if wage costs, for example, pick up other outlays like travel and entertainment won’t regain pre-pandemic levels for a while. True, input prices are rising, including some commodity costs. But companies are cutting expenses elsewhere and several, including Procter & Gamble and Kimberly-Clark, are responding by raising their prices.

The Wall Street consensus, calculated on the same basis as Goldman’s estimates, is for net profit margins of 11.4% in 2021 and 12.1% in 2022, the U.S. bank said. The increase that’s expected next year will be a stretch. Even the biggest U.S. companies may not have enough pricing power to pass on all the extra costs they face.

Fiscal policies may also limit margin growth. Even if U.S. President Joe Biden puts off for now a plan to raise the domestic corporate tax rate to 28% from 21%, he will want a 15% minimum levy instead. And talks on setting the same minimum globally, which got a boost after the world’s richest nations agreed on the issue last weekend, suggest the zeitgeist is for companies to contribute more to public coffers. U.S. profit margins may be as good as they are going to get.

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