Barclays sees more margin risk ahead for US companies

Barclays analysts warned of increasing pressure on corporate profit margins in the United States in a note Thursday. Their note highlights several trends that suggest a challenging environment for businesses.

“Concentration rising again after 1Q24 results reinforced Tech exceptionalism,” states the Barclays note. They point to the continued dominance of large technology companies in terms of earnings growth and margin expansion. This trend is limiting opportunities in other sectors.

Barclays also observes a shift in investor sentiment. “Growth vs. value begins to price in rate cuts,” the note states. While growth stocks have outperformed so far in 2024, Barclays believes this reflects anticipation of an interest rate cut by the Federal Reserve, potentially benefiting growth stocks. This has led to a decline in investor interest in value stocks.

The report identifies a new beneficiary of investor enthusiasm: Utilities. “AI hype engulfs Utilities,” says Barclays. While utilities are traditionally seen as a hedge against falling interest rates, Barclays believes their recent outperformance is due to speculation about their role in supporting data centers, a key driver of AI technology.

However, Barclays warns that this enthusiasm may be misplaced. “Historically, Utilities have delivered middling returns in the 6 months leading up to a Fed cutting cycle,” they write.

Finally, Barclays emphasizes a potential threat to corporate profitability: weakening pricing power. They point to underperformance by companies that previously enjoyed high pricing power during inflationary periods. Barclays believes that consumer stress and the possibility of a delayed rate cut by the Fed will make it difficult for companies to maintain margins.

Overall, the Barclays note paints a cautious picture for US companies, highlighting potential margin pressures and a challenging investment environment.