Stock Market Insights: Low profits

DR. RICHARD BAKER, AIF®, is the founder of and an executive wealth advisor at Fervent Wealth Management. https://www.facebook.com/Dr.RichardBaker

Which part of Walmart is the most profitable?” I was a college intern at the Branson, MO, Walmart, and the store manager had just asked me this question. Of course, I answered, “electronics or automotive.” But, he said, “it’s the clothes, don’t ever forget it’s those clothes that pay our salaries because they have the biggest profit margin.” Profits matter.

While stocks are up so far this year, they’ve done so with a surprising trend: declining profit margins at big U.S. companies. This is strange because stocks generally go up with higher profits and down with lower profits.

Profits are down because companies face higher material costs to make their products. In the same way, it now costs you more money for the ingredients to make your famous apple pie; it costs companies more to make their products, lowering their profits.

Profit margins of companies in the S&P 500 fell over 11% last quarter, according to FactSet. Yet, stocks are rallying even though their profitability is being squeezed. Even with the down market in the last couple of weeks, the S&P 500 is up more than 4% this year based on the February 22nd close.

Investors started off 2023 overlooking profits because they expected the Federal Reserve to cut interest rates early in the year. However, in the last few days, investors now expect the Fed to take rates higher and for longer than they hoped.

We had a solid start for stocks this year, and I expect a solid finish, but there might be some difficulty in between. With potential short-term volatility, I’ve taken some of the early-year gains in the accounts I manage from growth stocks and moved more into value stocks. Value stocks have good valuations and have historically performed better during high inflation and higher interest rates.

One of my most memorable times at Walmart was when the company missed its quarterly profit for the first time in years. The executives chewed out all the managers and made us tape a quarter coin onto our name badge to shame us into focusing more on profits. Maybe we should tape a quarter coin on everyone’s name tag so they won’t overlook profits again.

Have a blessed week!

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