Strategists at Wall Street’s two top-tier banks are split on the outlook for profit margins: Goldman Sachs Group Inc. sees falling inflation boosting the key metric, while JPMorgan Chase & Co. warned companies are quickly losing pricing power.
Goldman’s David Kostin said the S&P 500 will rise slightly in 2024 as companies benefit from faster cooling in raw material and labor costs. “Concerns about recession and Fed tightening are abating, and profitability for the broader index should continue to improve,” he added.
JPMorgan’s Mislav Matejka takes the opposite stance. He has warned that semiconductor stocks, whose profit margins are already at record highs, will suffer this year under a feeble economy.
The difference between the two strategists highlights the difficulty facing investors trying to decipher mixed economic signals and uncertainty over the timing of interest rate cuts. The picture may become more clear in the coming weeks as more companies release quarterly results, with Netflix Inc., Tesla Inc. and Intel Corp. due to report this week.
In Kostin’s view, easing inflation will benefit firms that have weaker pricing power, helping those stocks outperform this year. The bank highlighted a trading strategy based around the idea and a basket of companies including Tesla, Advanced Micro Devices Inc. and Thermo Fisher Scientific Inc.
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So far, companies have given a mixed picture of their profit margins. Lululemon Athletica Inc. raised its profit margin forecast, while JD Sports Fashion Plc said margins will be smaller due to special offers and promotions.
In a report, Matejka wrote that profit margins look stretched for cyclical sectors like financials and consumer discretionary. “As the positive impact from Covid distortions gets priced out, earnings and margins could suffer,” he said.
This article was provided by Bloomberg News.