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U.S. companies are learning to do more with less.
After slashing expenses in the first two quarters of 2020 in an attempt to mitigate slumping revenue, S&P 500 companies began hiring again as they reopened premises in the third quarter. However, costs rose more slowly than revenue in the third quarter, helping push margins for investment-grade-rated companies to their widest since the third quarter of 2018.
The median operating expenses-to-total revenue ratio for investment-grade companies in the S&P 500 excluding financials fell from 84.7% in the second quarter to 83.0% in the third quarter. The ratio was 0.9 percentage point lower than it was before the pandemic made itself felt in U.S. balance sheets.
Non-investment-grade companies improved their operating margins in the third quarter by even more than their investment-grade peers. Their median operating expenses-to-total revenue ratio fell to 91.8% in the third quarter from 95.0% in the second quarter, still slightly above the third quarter of 2019's 90.9%.
The question for many investors is whether this represents a permanent shift to leaner operations or whether spending will eventually catch up with earnings as the recovery accelerates.
"Margins look poised to be fairly strong in 2021 for the average company. In fact, in the third quarter, the net profit margin for the median company in...