After raising prices sharply, corporate profits get squeezed as inflation eases
After enjoying a strong run where they could keep raising prices to boost their profits, companies are now stuck in a vise
NEW YORK — The squeeze is on for profits at big companies.
After enjoying a strong run where they could keep raising prices to boost their profits, companies are now stuck in a vise. On one end, revenue is under pressure as the global economy remains fragile. On the other, companies are having to pay higher wages for workers, among other costs.
Caught in the middle are corporate profit margins, which measure how much in profit companies make on each $1 of revenue.
Consider Tesla, which reported not only stronger profit but also better revenue for the spring than analysts expected. Its stock nevertheless tumbled nearly 10% following the report, as some investors focused on its falling profit margins.
The electric vehicle maker made an operating profit of $9.60 off every $100 in revenue from April through June. That was down from $11.40 three months earlier and from $14.60 a year earlier.
Not only did Tesla cut prices on some of its models to drive sales, which pressured revenue, it also had higher costs driven by projects like its Cybertruck and an artificial-intelligence initiative.
Altogether, companies in the S&P 500 likely earned $111 in net profit for every $1,000 in revenue during the spring, according to FactSet. That would be the weakest level since the end of 2020, when the economy was still coming out of the crater created by the coronavirus pandemic.
The threat for the stock market is that margins could remain pressured. That would cap profits, which are already on track for a third straight quarter of year-over-year declines.
Many analysts believe margins hit bottom in the second quarter,
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