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Margin Resilience Is Key

June 24, 2025

Time to Read: 3 minutes

U.S. equities have had a challenging first half of the year, underperforming the rest of the world. A primary cause of this underperformance has been higher policy uncertainty and concerns about the impact of higher tariffs on growth.

While policy uncertainty can impact short-term volatility and lead to periods of underperformance, what does this mean for returns over the long term? Important drivers of long-term returns are earnings and profit margins, areas where the U.S. has continued to outperform. In fact, since 2010 margins increased 6.4% to 13.5% as compared to a 2.7% increase in Europe to 10.1%. The difference between U.S. and European margins is now 3.4%, near the highest in history.

Additionally, technology leadership and increased adoption of artificial intelligence (AI) across diverse industries will likely support the continued expansion of U.S. margins, allowing them to surpass the rest of the world. Considering the many ways AI can improve profit margins for businesses, we anticipate that 2025 S&P 500 earnings per share will come in at $260-$270, demonstrating positive growth of roughly 8% as strong earnings and margin expansion continue to drive U.S. exceptionalism into the future.

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Are Earnings Broadening Beyond the Mag-7?

Tech stocks have outperformed the rest of the S&P 500 for several years, and while we expect earnings growth among these companies to continue in 2026, we see another encouraging trend emerging. Earnings across the rest of the market are on an upward path too — and are set to contribute more to earnings growth for the S&P 500 Index in 2026 than the Magnificent 7.

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Positive Signals from Industrial Production?

Industrial production is a proxy for the level of manufacturing in the economy, and last week’s report showed the highest growth rate in three years.

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Healthy Correction?

After climbing 17% year to date through late October, the S&P 500 declined 5% through November 20. We believe the market was due for a healthy correction. While further downside is possible, it would not concern us.

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The Global Economy Is Holding Up

This past year was rife with risks to the global economy: policy changes, tariff uncertainty and more. Yet, the global economy held up as manufacturing and services activity strengthened across the world.

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