Falling profit margins raise some alarm: 'It can be a precursor to layoffs and a recession'

As corporate earnings reports roll in, analysts are keeping a close eye on profit margins as a possible early warning signal for the markets and economy.

Profit margins are showing some signs of contraction, but Ned Davis Research analysts say there’s no broad deterioration yet, and they expect margins to be flattish. But the analysts do note that “stagnating margins are an obstacle in the way of accelerating earnings growth, something likely needed for a year-end rally.”

Net profit margins for the third quarter are currently predicted to be 11.3% for the S&P 500, below the 11.5% of the second quarter but better than the first quarter’s 11%, according to FactSet.

“If 11.3% is the actual net profit margin for the quarter, it will mark the first time the index has reported three straight…

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