Six quarters of shrinking margins among S & P 500 companies have ended — and according to a Barclay’s analysis, that flip has historically led to a higher market in the months ahead. “Post-margin inflection market returns” averaged 15% to 17%” over the next six to 12 months, with consistent outperformance in tech, consumer, health care, and materials, the analysts said in a note to clients this week. Barclay’s looked at “10 comparable episodes” over the past 45 years that lasted on average for six quarters after margin pressures first hit. The analysts said this arch happened most recently from the first quarter of 2022 to the second quarter of 2023. However, Barclay’s did temper its optimism, saying most S & P 500 companies are not doing as well as the market-cap weighted index may indicate. In the past, we’ve done a performance comparison with the equal-weighted S & P 500 and arrived at a similar conclusion. That said, we found the screen intriguing and decided to see how margin performance is playing out for each company in our portfolio. Importantly, we aren’t simply looking for margin expansion or general improvement but rather for operating margins at companies that expanded for the first time in the most recently reported quarter. As a second layer, Wall Street must expect the switch from negative to positive operating margins to continue into the foreseeable future. In this case, that’s at least six more quarters. The historical data and the forward estimates were sourced from FactSet. Five Club stocks met the criteria that were inspired by the Barclay’s report. These companies delivered operating margin expansion in the most recently reported quarter following a streak of contraction. One of these names, Costco (COST), will be put to the test next week when it reports earnings. COST YTD mountain Costco YTD Following five straight quarters of operating margin compression, Costco reported back in September expansion in its final quarter of 2023. The…
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