As MarketWatch previously reported, the S&P 500’s profit margins had never been 11%. They had passed 10% only twice before reaching 12% in 2021, despite labor market shocks and global supply chains that forced companies to pay more for workers and shipping.

The record profit margins came amid record inflation, suggesting that companies took advantage of the higher prices passed on to consumers rather than trying to catch up on increased costs — the reason many executives have cited for rising prices.

Profound: Corporate earnings are at levels far beyond anything we’ve ever seen, and are expected to continue to grow

Still, projections for future profit margins are already falling and are likely to continue falling as early optimism later gives way to greater clarity on companies’ true financial results. Wall Street expected annual profit margins to hit 13% by 2022 early this year. But that goal, as well as expectations for future years, were falling all the time. In recent weeks, analysts have already become more pessimistic about companies’ earnings per share in the first half of this year.

The higher margin projections may also be related to timing and how previous decisions to raise prices, combined with more recent decisions to cut costs, end up on the top and bottom line. Profits for some companies, such as jetmaker Boeing Co. BA
and Amazon.com Inc. AMZN
— a company large enough to determine whether S&P 500 earnings rise or fall this year — is expected to make a big comeback this year as well.

“In general, many companies have been able to increase their prices to offset the increased costs,” said John Butters, senior earnings analyst at FactSet. “Some of these companies have discussed a lag effect where it took some time for price increases to catch up with cost increases, so this could be a factor.”

He noted that executives at Conagra Brands Inc. CAG
— which makes food under names like Healthy Choice and Duncan Hines — said on an earnings call this month that there was an “inherent lag between when we implemented price actions and when we realize the benefits of those actions in our topline results.” Margins took a hit during that window.

But management said margins entered a rebound phase when that window closed, and that “inflation began to moderate in certain areas, allowing our inflation-justified pricing actions to catch up with rising costs.”

See also: Investors are ‘desperate’ for a recession to force the Fed to cut rates, but what will happen to markets if the economy stays healthy?

Butters also noted that FedEx Corp. FDX,
meanwhile reduces costs and also increases shipping costs this year. When the air and ground parcel delivery company reported revenue in December, executives said shipping volumes were declining, but they were still monetizing each delivery through surcharges.

More workers have demanded better pay and benefits over the past three years after dealing with the stress of understaffing and the risk of exposure to COVID-19 at work. In turn, bosses have become more anxious as they struggle to attract employees who are more willing to weigh their options and deal with investor pressure to keep prices high and costs low. Labor is often one of a company’s biggest costs, and many companies have raised wages or added other incentives to attract talent.

In an analysis of the 20 companies that have made fourth-quarter earnings calls so far, FactSet found that just over half cited “negative impacts” from labor costs and a tougher exchange rate. In a Deloitte survey of retail executives released Thursday, 70% said “labour was the No. 1 challenge heading into 2023” as many job openings remain unfilled.

As executives juggle those costs and a slowing economy, analyst sentiment for the first half of the year has turned sharply. “In recent weeks, earnings expectations for the first quarter and second quarter of 2023 have switched from year-over-year growth to year-over-year declines,” the FactSet report said on Friday. However, analysts expect a recovery in the second half of the year.

This week in profit

Twenty six S&P 500 SPX
companies will report this week. Of these, two are members of the Dow Jones Industrial Average. DJIA

United Airlines Holdings Inc. UAL
releases earnings after the close on Tuesday, after Delta Air Lines Inc. VALLEY
issued a Q1 outlook that disappointed investors as it tries to contain higher labor costs. Transportation and Logistics Service JB Hunt Transportation Services Inc. JBHT
reports results on Wednesday, following a drop in demand for goods made for cheaper shipping.

Netflix Inc. NFLX
reports Thursday, as it pushes ad-supported streaming and shakes up financial forecasts after staff cuts and a miserable year for its stock. Procter & Gamble Co. PG
— the consumer goods giant best known for products like Bounty paper towels, Crest toothpaste, and Head & Shoulders shampoo — will also release quarterly results, after price increases helped earnings last year, amid a consumer boom to essentials.

The bank earnings parade also continued as higher interest rates hit earnings for JPMorgan Chase & Co.,
Bank of America Corp. BAC,
Citigroup Inc.C
and Wells Fargo & Co. WFC
despite a delay in making deals.

Among the banks reporting Tuesday were Morgan Stanley MS
and rival Goldman Sachs Group Inc. GS
Both reported lower fourth-quarter earnings amid the deal delay. Trading results were mixed, even as the Fed’s battle against inflation keeps markets turbulent.

See also: Jobs added at Morgan Stanley, Bank of America, Citi and JPMorgan but cut at Wells Fargo and Goldman

Silvergate Capital Corp SI,
a bank that handles cryptocurrency payments also reported a $1 billion loss on Tuesday and said it would “substantially reduce its workforce,” following a race to plug holes in its finances amid the run on crypto following the collapse of ftx. PNC Financial Services Group Inc. PNC
reports Wednesday, as does Discover Financial Services DFS.

Last week, JPMorgan CEO Jamie Dimon said the US economy was strong, but the impact of inflation was still unclear. And Chief Financial Officer Jeremy Barnum said on the company’s earnings call that the company had set aside $1.4 billion in reserves following changes in its financial outlook, “which now reflect a mild recession in the central case.” The company’s fixed income revenues rose 12% in the fourth quarter, with management saying “the heightened volatility led to strong client activity”.

The call to put in your agenda

United Airlines: United Airlines will report based on results from Delta, which said travel demand was still strong and its first-quarter forecast included “all labor cost increases.” Higher fuel costs, labor tensions and issues with airline flight management technology remain key issues for the industry, following Southwest’s debacle with flight cancellations this winter and airline staff demonstrations last year.

Delta and its pilot union reached an initial agreement last month on substantial wage increases. As other news outlets have noted, similar pay increases could flow through the rest of the industry. After many airline staff took buyouts in 2020 when the pandemic first hit, airlines were understaffed when travel returned.

The numbers to watch

Netflix’s financials, minus subscriber forecasts: Netflix said last year that starting this year it would stop providing prospects for new subscribers — one of the main drivers of stock price — and focus more on earnings and sales.

The decision, as MarketWatch reported in a Netflix earnings preview Friday, comes as more analysts focus on streaming platform profitability amid a slump in digital ad spending and a proliferation of other online viewing options.

Netflix revenue example: Without subscription guidance, the focus is on financial estimates

Netflix launched a cheaper version of its streaming service with ads. But even as the digital ad market weakens, Jefferies analyst Andrew Uerkwitz said in a note that Netflix and Disney+ were poised to take on the bulk of connected TV advertising spending. A poll of Cowen’s 50 major ad buyers also found that 41% expect their largest customers to advertise on Netflix.

Still, other analysts suggested that Netflix was living in a post-Squid Game world. Barclays analyst Kannan Venkateshwar said Netflix’s fourth-quarter subscribers were on track to remain well short of the 4.5 million it predicted, following a drop in viewership following a record showing last year for the survivalist thriller series.