Higher Margins Drive Robust Earnings

Chart is for illustrative purposes only. Past performance is not necessarily an indication of future results

Second quarter earnings season is winding down, with ~92% of S&P 500 companies having reported.¹ Over 80% of those companies beat analysts’ expectations, pleasing many investors and correcting a downward shift in S&P 500 margin estimates that has stabilized since May.²

Margins illustrate the quality and durability of corporate earnings by demonstrating how effectively a company controls costs and converts sales into profits. In 2025, net margins are expected to reach 13.3%, up from 12.9% in 2024, as well as increase another 0.7% to 14.0% in 2026.³ Notably, estimates for technology companies are significantly better than those of the entire S&P 500.⁴

In fact, technology enhancements are the key driver of higher margins for the index. Specifically, we believe the continued development and broadening adoption of artificial intelligence (AI) should bolster companies’ productivity and, in turn, lead to higher margins. Some of the ways that AI may increase margins include improving operational efficiency, employing data-driven decision making, enhancing supply chain optimization, and enabling product and service innovations.

The immense progress in AI and its encouraging potential support our strategic view of equities. Improving estimates for both margins and earnings underscore our tilt toward large cap stocks.

1,2,3,4 Source: Bloomberg, August 2025.

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