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S&P 500 companies are keeping more profit from every dollar in sales than ever before, providing another tailwind for stocks.
Using FactSet data, John Butters, senior earnings analyst and vice president at FactSet, showed that the S&P 500’s blended net profit margin is running at 16.9% for the second quarter. That’s up from 14.8% in the first quarter and 12.9% a year ago, and well above the five-year average of 12.4%.
Net profit margin is the percentage of revenue companies get to pocket after they have paid all expenses.
If that 16.9% figure holds, it would be the highest net profit margin since FactSet began tracking the metric in 2009, Butters notes.
Alphabet and Amazon are the biggest contributors to the S&P 500’s record-high net profit margin, Butters said.
Alphabet reported operating margin of 34% in the second quarter, up from 32% a year earlier. The Google parent also posted a $98 billion gain in other income, primarily from unrealized gains on equity securities. Amazon recorded other income of $53.4 billion on a net basis largely tied to its investment in Anthropic. The e-commerce and cloud giant also posted operating margin of 13.7% in the second quarter, up from 11.4% a year ago.
But the strength goes beyond these two mega caps.
Even after excluding Alphabet and Amazon, the S&P 500 margin still looks impressive at 15%, which is also a record and marks the highest net profit margin reported by the index dating back to 2009.
At sector levels, margins have been improving across most of the market.
Eight of the 11 S&P 500 sectors are reporting higher margins than they did a year ago, led by technology, communication services, consumer discretionary and energy.
Adam Schickling, a senior economist at Vanguard, told CNBC that the strong demand and operating leverage have helped companies convert more of their revenue into profit.
“Businesses, when they’re busy, are more profitable,” Schickling said. “Firms are busier, they’re more efficient, and that translates into higher margins.”
Technology companies have historically benefited from business models that can add customers or users without a proportionate increase in costs.
“Tech companies just have higher profit margins than what you might see from materials, industrials, energy,” Schickling said. “That is a sector is prone to having a higher general profit margin, especially because it has historically been relatively asset-light, which means they’re able to scale up at a very efficient rate.”
Businesses in the tech sector, however, are also experiencing a lot of competitive pressure, with many new entrants to the space, which could mean a potential risk in the future to profit margins in the technology space, Schickling said.