3 Reasons S&P 500 Profits May Stall

Mar 12, 2024

Investors banking on companies’ ability to grow operating margins may be disappointed.

Lisa Shalett

Key Takeaways

  • Equities are surging on expectations that a robust economy will lead to corporate profit growth.
  • However, companies reported disappointing fourth-quarter operating margins, and analysts are revising down their profit forecasts for this quarter.
  • Meanwhile, signals from other markets suggest a scenario of slowing growth and persistent inflation.
  • Investors are advised to seek value in U.S. equities and balance portfolio exposure with quality growth investments in sectors such as energy, utilities, materials, financials and health care.

Stock prices have continued to surge, as investors expect a robust economy to translate into growth in companies’ revenues and earnings. Current estimates of 2025 earnings for S&P 500 Index companies are between $272 and $277 per share—a 25% jump from 2023 levels. At the heart of these optimistic forecasts is investors’ belief that companies’ operating-profit margins will expand. 


“Operating margin” measures how much profit a company makes on each dollar of sales after paying for the costs of production, such as materials and wages, but before paying interest and taxes. Investors seem to be banking on companies’ ability to grow this metric, but that’s a hypothesis we continue to approach with caution. Here are three key reasons.

  1. 1
    Companies reported disappointing margins in the fourth quarter of 2023.

    S&P 500 companies, excluding the mega-cap “Magnificent 7” tech stocks, actually saw their operating margins decline last quarter. What’s more, the share of companies reporting higher margins than analysts expected was only about 44%—among the lowest in two years. Such challenges came despite several factors that should have helped boost companies’ profitability, such as falling manufacturing costs and a strong U.S. dollar, not to mention labor costs that grew by half the estimated pace and economic productivity that rose a solid 3.2%.  

  2. 2
    Analysts are lowering their profit forecasts.

    Since the first quarter of 2024 began, analysts have continued to revise down their earnings estimates. As of January, expectations for the quarter’s year-over-year earnings growth were 6.5% for the S&P 500 overall, and just 2.8% for the index if we leave out the Magnificent 7. Those numbers have faded now to 4.3% and -0.65%, respectively.

  3. 3
    Growth may not prove as robust as equity investors think.

    Although equity markets appear to expect healthy economic growth that drives margin expansion, the markets for other asset classes seem to anticipate a different outcome. One-year inflation swaps (i.e., contracts that transfer inflation risk from one party to another) have risen to above 2.5%, suggesting some investors expect resurgent inflation. Gold is setting new record highs, while the U.S. dollar is weakening, implying that some investors may be seeking to hedge inflation amid potential economic weakness. Such positioning suggests a “stagflation” scenario in which the economy could stall while inflation persists, especially if labor markets stay tight. 

Learning from the Past

History suggests that generating sustainable changes in operating margins is very difficult. Case in point: At the turn of the century, the transformative wonders of the internet seemed to hold immense potential to bolster company profitability—yet S&P 500 operating margins remained in a very tight range of 9.5%-10.5% for most of the time between 2000 and 2016.


In more recent years, the growing margins of mega-cap tech stocks have in turn caused the S&P 500’s average margin to expand. While many market participants seem to expect this trend to continue, we would caution that the recent surge in productivity and margin growth may only be temporary.

How to Invest

In this environment, investors may want to seek out value in U.S. equities. Also consider balancing passive portfolio exposure to market-capitalization-weighted indices with quality growth investments in sectors such as energy, utilities, materials, financials and health care.


These areas present opportunities to hedge against excessive exuberance in the market while providing exposure to long-term growth themes beyond popular tech stocks.


This article is based on Lisa Shalett’s Global Investment Committee Weekly report from March 11, 2024, “So, About That Margin Expansion.” Ask your Morgan Stanley Financial Advisor for a copy. Listen to the audiocast based on this report.

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