Inflation remains elevated and, judging by third-quarter earnings conference calls so far, a big worry for corporate managers. It begs the question: How are net profit margins holding up?

It’s a mixed picture. The silver lining is that, although corporate profit margins are indeed declining, they’re not collapsing. In fact, they’re projected to soon resume an upward trajectory, a sign that managers are getting more adept at handling inflation and more confident that it will abate.

As of this writing, the blended net profit margin for the S&P 500 for Q3 2022 is 12.0%, which is below the Q2 net profit margin, and below the year-ago net profit margin. However, it’s above the five-year average of 11.3%.

If 12.0% is the actual net profit margin for Q3, it will mark the fifth straight quarter in which the net profit margin for the index has declined quarter-over-quarter.

That said, profit margins have held up remarkably well, considering the torrid rate of inflation. A major reason has been the resourcefulness of companies in cutting costs, streamlining inventories, and wringing efficiencies from their enterprises. Companies with strong market share and brand loyalty also have scored successes in hiking prices without losing customers.

Q3 represents the seventh straight quarter that the average net profit margin has reached 12% or higher (see chart).

Previous to this streak, the net profit margin only hit 12% in one other quarter (Q3 2018) during the previous 10 years.

Energy leads the way…

Three sectors are reporting a year-over-year increase in their net profit margins in Q3 2022 compared to Q3 2021, led by energy (to 14.6% vs. 8.9%). Due to the rebound in crude oil prices, the energy sector has been leading the pack on several metrics, including year-over-year earnings growth.

Seven sectors are reporting net profit margins in Q3 2022 that are above their five-year averages, led by (you guessed it) energy, at 14.6% vs. 6.8%. Five sectors are reporting a quarter-over-quarter increase in their net profit margins in Q3 2022 compared to Q2 2022, led by utilities (to 16.0% vs. 12.7%).

Inflation remains hot, but it’s showing signs of peaking, which in turn is fueling optimism over future net profit margins. The Wall Street consensus projects that net profit margins for the S&P 500 will be higher than Q3 2022 for the rest of calendar year (CY) 2022 and for the first half of CY 2023. As of this writing, the estimated net profit margins for Q4 2022, Q1 2023 and Q2 2023 are 12.1%, 12.3%, and 12.5%, respectively.

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Third-quarter corporate earnings continue to roll in this week, with all eyes on Big Tech. After Netflix (NSDQ: NFLX) crushed expectations last week, the mood toward the tech sector has turned more bullish, despite rising interest rates.

On Tuesday, amid growing optimism over earnings, the major U.S. stock market indices capped a third day of gains and closed higher, as follows:

• DJIA: +1.07%
• S&P 500: +1.63%
• NASDAQ: +2.25%
• Russell 2000: +2.73%

A sigh of relief across the pond…

European equity indices jumped on the news Monday that the British Conservative Party had voted for Rishi Sunak as their leader, making him the country’s new prime minister.

Sunak is of Indian descent and the first non-white in British politics to climb to the top of the greasy pole. A multimillionaire, he’s viewed as a middle-of-the-road, market-friendly technocrat.

Sunak previously served with distinction as Chancellor of the Exchequer and Chief Secretary to the Treasury. His proven competence is seen by global investors as a welcome change from the mind-boggling ineptitude of the outgoing Liz Truss, who only lasted 44 days in the job. A British tabloid had been holding a contest, to see whether her tenure at 10 Downing Street would last longer than a head of lettuce. The lettuce won.

European stocks closed higher on Tuesday as well. Regardless, Sunak faces daunting challenges in guiding the world’s sixth-largest economy, including rapid inflation, a contracting economy, the continuing complications of Brexit, a fractious Conservative Party, and sky-high energy prices that are proving ruinous for consumers and businesses. His honeymoon won’t last long.

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John Persinos is the editorial director of Investing Daily.

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