The outlook for company margins appears to be moderating as concerns about the Delta variant and inflationary pressures show no sign of abating and demand starts to normalise in some sectors. Only 41 per cent of Fidelity analysts now expect EBITDA margins (earnings before interest, tax, depreciation, and amortisation) to rise over the next 12 months, compared to 53 per cent in June. Almost 30 per cent of analysts believe that margins will fall over the next year, with the balance anticipating that they will remain the same. 

Financials is the one sector that bucks the trend and a slightly higher proportion of analysts now expect margins to rise over the next year. This is partly due to the Federal Reserve signalling last month that it could start to taper bond purchases this year, which would support yields on loans and increase margins for banks. “If the rise in inflation comes with higher yields, banks will benefit from increasing net interest income,” reports one analyst covering European financials.

Inflationary pressures meanwhile are dampening the outlook for margins in other industries and particularly those with less pricing power. An analyst who covers European materials firms points out: “Costs will go up, but firms won't be able to pass them on to customers as metals and mining companies are purely price takers.” The Delta variant is also causing concern in some sectors as fears of future lockdowns cloud the macroeconomic outlook. 

Demand starts to moderate

For some companies, however, expectations for margins are simply falling back from elevated levels. “They are normalising after many chemicals companies benefited from abnormally high margins after the Texas cold wave in February resulted in forces majeures and shortages of many chemical products,” reports one analyst covering Japanese materials companies. 

Margins are also set to return to earth for some consumer discretionary companies. “Demand is currently outstripping supply, which is causing unsustainably high margins,” reports one analyst covering North American auto firms and apparel and durable goods retailers. “As supply picks up and consumer demand shifts towards services this will cause margin pressure in those industries.”

Corporate profits should remain healthy 

Despite a more moderate outlook for margins, the outlook for profits remains robust overall. Fidelity’s own aggregate estimates indicate that growth in net income across all sectors should normalise from an elevated 45 per cent in 2021 to a more sustainable 7.9 per cent next year. Analyst optimism may be easing, but corporate profit growth should remain healthy going into 2022

Terry Raven

Terry Raven

Director, European Equities

Gita Bal

Gita Bal

Global Head of Research, Fixed Income