Chart of the Week: As corporate earnings slow, will profit margins tighten?

Corporate America staged a spectacular earnings recovery that drove the market rally of 2021. But growth in earnings per share (EPS) is expected to slow in 2022, according to the first S&P 500 EPS forecasts for 2022, made available from the Institutional Broker’s Estimate System (I/B/E/S). At 9%, the forecast for EPS growth is on the low side for world’s largest and most robust corporations: indeed, it has rarely been lower outside recessions, as the chart illustrates. Some slowdown from the hectic pace of 2021 is to be expected, and the forecast for 2022 is consistent with that. But we will be monitoring the tightness of corporate profit margins to gauge the risk that it might become a more pronounced and widespread slowdown. Ever-rising costs and an inability to pass them on to customers as successfully as in 2021 may squeeze profit margins further than the I/B/E/S forecast suggests. If that were to transpire, it would put the brakes on growth and could herald a rotation out of equities. The corporate earnings season is now under way, and much hinges on how it develops: watch this space.