Where We Are Today: U.S. corporate profitability is near record highs, with S&P 500 profit margins at 13.9% and expected to rise toward 16.2% (Chart 1). Strong demand, stable labor costs, and the AI investment cycle continue to support earnings growth. Big Techs are projected to spend $740bn in 2026, up from $425bn in 2025, keeping conditions highly supportive for corporate profits.
Why Profits May Remain Elevated: While many investors expect profit margins to revert towards historical averages, we believe structural changes have raised the floor for corporate profitability. Today’s largest companies benefit from exceptional scale, industry concentration and pricing power (Chart 2), enabling them to sustain margins in ways that smaller competitors cannot. It is also important to distinguish between earnings growth and margin expansion. The AI investment cycle should continue to support earnings growth through robust demand for infrastructure and semiconductor-related products. However, for many AI adopters, rising capital expenditure, depreciation and infrastructure costs may limit further margin expansion. As a result, while margins may not continue rising indefinitely, industry concentration, scale advantages and pricing power should help keep corporate profitability sustainably above historical norms.
Risks to Monitor: Over the next one to three years, AI is the key uncertainty. A moderation in AI spending could slow earnings growth, while excessive investment may contribute to economic overheating and margin pressure. Elevated valuations, now ~21x forward earnings versus a 20-year average of 16–17x, reflect expectations of sustained earnings growth for years to come, leaving little margin for error should growth disappoint or sentiment weaken.
Portfolio Implications: We remain constructive on equities but increasingly selective. Rather than chasing the most crowded AI beneficiaries, we favor high-quality businesses with durable cash flows, pricing power, and reasonable valuations. Record profitability is likely to prove more durable than in past cycles because of structural changes in the economy, though investors should not expect margins to rise indefinitely.
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This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.
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The S&P 500 Index is a market capitalization–weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance.
