MW Nvidia just ended an earnings recession and is helping to reshape corporate profits
6:33 PM ET 11/21/23 | MarketWatch
By Jeremy C. Owens
Recession that began with last year's holiday quarter is going to end, while historically anomalous profit margins will persist, thanks to the AI boom at Nvidia and Big Tech's layoffs
With yet another blowout earnings report, Nvidia Corp. has ended an earnings recession in the U.S. and helped to solidify the continuation of a drastic change to corporate profits.
Nvidia (NVDA) on Tuesday rode enduring demand for hardware that is essential for artificial-intelligence tasks to yet another record quarter, as revenue tripled and profit zoomed more than 1,300% higher year over year. Nvidia recorded earnings of more than $9 billion in just three months, a total it had never achieved in a full year before 2022.
That change in Nvidia's earnings has had an immediate effect on the profit profile of all of corporate America. Nvidia's results were expected to have the biggest effect on earnings growth for the entire S&P 500 SPX in the third quarter, and the beat reported Tuesday afternoon solidifies the end of an earnings recession.
Earnings for the S&P 500 had declined for three consecutive quarters starting with the holiday season last year, but they were headed for an increase this quarter even before Nvidia beat analysts' average profit estimate by nearly $2 billion. Adding Nvidia's numbers to results already reported this quarter -- 94% of the S&P 500 had divulged third-quarter results heading into the week -- solidifies the end of that recession, which occurs when earnings decline two quarters or more in a row.
The beat will also put the S&P 500 on track to continue posting record profit margins well higher than anything the index recorded prior to the COVID-19 pandemic. As MarketWatch has reported, the S&P 500's profit margin had never topped 10.75% in a year before 2021, and had surpassed 10% only twice, but it is now headed for its third consecutive year at or higher than 12%.
The sudden and dramatic jump in corporate profit margins amid decades-high inflation led to accusations of "greedflation," or raising prices solely to pad profit. But margins have actually declined for many consumer-staples companies during the past year, while Big Tech companies like Nvidia have been the biggest poster children for margin expansion.
Technology companies have long had larger margins than other sectors, and the giant profit totals of companies like Google parent Alphabet Inc. (GOOGL) (GOOG), Amazon.com Inc. (AMZN), Apple Inc. (AAPL), Facebook parent Meta Platforms Inc. (META) and Microsoft Corp. (MSFT) are now driving profit margins to stay at their elevated levels. After laying off workers earlier this year, Amazon's earnings more than tripled, Meta's profit more than doubled, and Google's earnings rose nearly 50% year-over-year in the third quarter.
Before Nvidia's strong results and forecast make it into the projections, Wall Street analysts are already expecting a 2023 profit margin of 11.99% for the S&P 500, according to Dow Jones Market Data. With Nvidia factored in, the index is likely to be on track to meet or exceed its 2022 profit margin of 12.12%.
With Big Tech providing massive profit gains once again after layoffs, and an AI boom that is expected to add to the strong performance, Wall Street expects the S&P 500's profit margin to continue growing from there. Analysts' expectations for the next two years call for a margin of 12.52% in 2024 and 13.16% in 2025, according to Dow Jones Market Data, both of which would be record highs for the S&P 500.
Thanks to their performance this year, the six tech companies mentioned in this article have the six highest market capitalizations in the S&P 500. Only Meta is worth less than $1 trillion individually, and they are worth more than $11 trillion collectively as of the end of Tuesday's trading session, according to FactSet.
-Jeremy C. Owens
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
> Dow Jones Newswires
November 21, 2023 18:33 ET (23:33 GMT)
Copyright (c) 2023 Dow Jones & Company, Inc.
This content is being provided to you for informational purposes only. The content has been prepared by third parties not affiliated with E*TRADE Securities LLC, a business of Morgan Stanley, or any of its affiliates ("E*TRADE") and E*TRADE is not responsible for its content. This content and any information contained therein neither is, nor should be construed as, an offer or a solicitation of an offer, or a recommendation, to buy, sell, or hold any security, financial product, or instrument discussed herein, or to open a particular account or to engage in any specific investment strategy. E*TRADE does not offer or provide any opinion regarding the nature, potential, value, suitability or profitability of any particular investment or investment strategy, and you shall be fully responsible for any investment decisions you make, and such decisions will be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs. E*TRADE is not affiliated with Argus, Thomson Reuters, Market Edge, Trefis, TipRanks, or SmartConsensus by ResearchTeam™, a product of Markit On Demand.
Unless stated otherwise, the web content provided by the E*TRADE family of companies is for educational purposes only. The information and tools provided neither are, nor should be construed, as an offer, or a solicitation of an offer, to buy or sell securities by E*TRADE Securities LLC or its affiliates. Unless stated otherwise, no information presented constitutes a recommendation by E*TRADE Securities LLC or its affiliates to buy, sell or hold any security, financial product or instrument discussed therein or to engage in any specific investment strategy.
E*TRADE may make available links to other, third party sites or electronic services providers. The material is also being provided to you for educational purposes only unless stated otherwise. The content has been written by a third party not affiliated with E*TRADE or any of its affiliates. E*TRADE and its affiliates are not responsible for the content and the content neither is, nor should be construed as, an offer, or a solicitation of an offer, to buy, sell, or hold any securities.
E*TRADE does not offer or provide any opinion regarding the nature, potential, value, suitability or profitability of any particular investment or investment strategy, and you shall be fully responsible for any investment decisions you make, and such decisions will be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs.
Quotes and other information supplied by independent providers identified on the E*TRADE vendor disclosures page.
|
