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Higher Margins Drive Robust Earnings

August 19, 2025

Time to Read: 2 minutes

Second quarter earnings season is winding down, with ~92% of S&P 500 companies having reported. 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.

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. Notably, estimates for technology companies are significantly better than those of the entire S&P 500.

In fact, technology enhancements are the key driver of higher margins for the index. Specifically, 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 increases 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 constructive view of equities. Improving estimates for both margins and earnings underscore our overweight position in large cap stocks and should push the market higher by year end.

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Cuts Are Coming

Last Friday, Federal Reserve Chair Jerome Powell described a shift in the balance of employment and inflation risks, and the market rallied on the news. For us, nothing has changed. We have been closely monitoring the labor market and indicators of inflation, and we continue to expect two rate cuts this year.

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Earnings Season Wrapping Up on a High Note

Second quarter earnings season is winding down, but earnings are up, and better than expected. Despite some potentially concerning signals from the real economy, including muted job gains, and possible seasonal volatility, we remain constructive on equities. A positive second quarter earnings season strengthens our conviction.

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Mixed Job Market

Last week the market received mixed messages about the condition of the labor market. Nonfarm payrolls came in lower than expected, and the previous two months of data were revised sharply lower. Yet initial jobless claims were also lower, and the unemployment rate remains in range. We believe the U.S. economy can still deliver modest growth this year.

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Are Valuations Expensive?

Our analysis suggests that valuations are high because the market – driven by tech – is more profitable.

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