AN EXCEPTIONAL YEAR? (July 13, 2026)
This chart from JP Morgan Asset Management’s Q3’26 chart package illustrates how exceptional 2026 is from a revenue and margins viewpoint, outside of an economic recovery. Projections show S&P 500 EPS up 24% with revenues and profit margins and margins up 10.9% and 13.7% respectively. The 25 year annual averages are +5.0% for revenues, +2.4% for margins and +7.6% total.
Note that no mention is made of the mark-to-market profits of a few hyperscalers in Q1’26, with some more likely in Q2 and possibly in Q3 if Anthropic IPOes.
The 57% contribution to total profit growth from margins is spectacular and clearly above trend as my arrow shows on this Yardeni chart.
Factset shows that only 3 sectors are enjoying much fatter margins this year: IT, Energy and Materials.
Not surprising for IT (AI), nor for commodity-related sectors (shortages from AI, wars).
The surprise for many pundits and investors is that this is no economy-wide bonanza. Actually, 6 of the other 8 sectors are showing margin contractions. Utes and Industrials’ margins are up only very marginally.
S&P 500 revenue growth of 10.9% also looks spectacular.
But
- 3 sectors (IT, Energy and Comm. Services) are actually booming at +34,2%, +27% and +13.7% respectively in Q2 for similar reasons.
- The other 8 sectors’ revenues are up a still respectable 7.7%, above the +5.0% 25-yr average…
- … but CPI-inflation was +3.8% in Q2’26 vs +2.5% on average since 2001 and +2.1% excluding the pandemic years. Most of the acceleration in revenues is from higher inflation and some of it from AI-related effects on sectors such as Utes (+8.3%) and Industrials (+7.6%).
Ed Yardeni illustrates the correlation between the growth rates for nominal GDP-Goods vs S&P 500 revenues. GDP-Goods growth of 9.4% is at the very top of its historical range, also because of higher inflation. The BEA does not publish a GDP-Goods inflation deflator but, from several goods-related series, one can infer that implicit goods inflation in the US is in the 4% range, some 2% above history.
Also interesting is the sharp acceleration in wholesaler sales starting in March 2025 and accelerating even more last spring, suggesting a strong desire by retailers (more recently by manufacturers as well) to boost inventories to beat tariffs and war-induced price increases.
Higher overall inflation (boosting revenues), coupled with slow wage growth rates (curbing costs), allows for broad margin expansion…
… augmented by AI-related profits from non-tech sectors. JPM calculates that earnings of “AI-Power” companies (equipment manufacturers and electric utilities) will grow 19% this year after +38% in 2025.
That said, Factset shows that excluding Energy, IT, Materials and Comm. Services (mainly Alphabet and Meta), 2026 profits are nowhere near spectacular after considering that Cons. Discretionary (Amazon) and Utes are mostly AI-boosted. Even with the AI-boost, the 7 slower growth EPS are only seen rising 9.0% this year on revenues up 7.0%.
Yet, analysts are forecasting these 7 sectors’ earnings to accelerate to +12.0% in 2027, double the expected growth of revenues (+6.1%). Slowing revenues with higher margins …
The US economy has entered a new era of flat to slightly declining working-age population which will require sustained high productivity as JPM demonstrates:
In an environment of potentially slower real GDP growth with stickier goods and services inflation (sustaining nominal GDP growth), high geopolitical uncertainty (including energy cost volatility and a rising trust shortage), prudent (uncertain) central banks and larger fiscal deficits,
Investors should be more selective about what they own and why they own it. Is the cash flow durable? Is there up-front yield? Is there collateral or structure protecting the downside? Is the exposure linked to nominal growth or inflation? Can control, governance, or operational improvement influence the outcome? Can the manager execute in a more complex environment?
In a higher-cost-of-capital world, value creation will likely need to come more from operational execution than from leverage or multiple expansion.
In public equities, for example, headline indices increasingly mask meaningful differences in profitability, productivity, business model durability, and access to capital.
Mega-cap companies continue to benefit from stronger margins, higher revenue per worker, better balance sheets, and more durable access to capital than much of the small-cap universe.
This reality matters for valuations. While starting multiples remain elevated, we do not think they should be interpreted through a simple mean-reversion lens, as today’s indices are higher quality than they have been historically, with stronger profitability, different sector composition, and a larger weight in companies with durable earnings power.
As such, we believe equity returns can still compound, but the burden of proof is shifting more towards earnings durability, margin expansion, and free cash flow generation than multiple expansion. (KKR)
Even within the S&P 500 index, growth and margins are not distributed equally as KKR, BCA Research, FT, Ed Yardeni and Goldman Sachs illustrate:
At a 20.4x P/E, historical 5-yr returns were in the 7% range but widely dispersed. The actual P/E ex-unusuals (i.e. hyperscalers’ mark-to-market profits) is closer to 21.5. At that level, returns are consistently near or below zero. Sounds like a market of stocks rather than a stock market.
