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Last week, we highlighted the incrementally increasing level of volatility in U.S. equities. Though choppy above, the underlying earnings current has proved more stable. Q3 blended earnings have been overwhelmingly positive, growing 13.1% year-over-year inside of the S&P500, and 61.9% in the Russell 2000. U.S. corporate profit margins are at their highest since at least 2009, and analysts expect them to rise further in 2026. So, while the market has pulled back in the short-run, earnings growth remains firmly intact!
For the second year in a row, I have the privilege of writing the week leading up to Thanksgiving, a time for family and feasting. Last year, in honor of the late John Madden, we handed out our inaugural Turkey Leg Award to the U.S. economy. This year, we’re back at the carving table. Let’s find out who takes home the trophy!
Last week, we highlighted the incremental rise in equity volatility. The S&P500 is down 5% from the all-time closing high from last month on October 28th. The NASDAQ is down 8% from the same day. Though, even as the market has backtracked, corporate earnings have accelerated higher. Price movement is irrational and non-linear in the short term, but corporate earnings growth drives long-term price appreciation and investor returns. So, for 2025, the Turkey Leg Award goes to… U.S. corporate earnings growth!
Earnings Feasting!
The S&P500 valuation is elevated and the forward question for further upside appreciation in the index was the deliverance of solid earnings and forward guidance. In large caps, over 92% of companies in the S&P500 have reported Q3 earnings and the blended growth rate sits at 13.1%.
In small caps, over 82% of companies in the Russell 2000 have reported Q3 earnings growth and the blended growth rate sits at 61.9%.
And analysts expect the growth to continue in 2026. In the S&P500, analysts expect another 13.5% growth rate in 2026—all good news for equity investors, but companies will need to deliver on these expectations:
Profit Margins Cooking!
Operating profits are growing too. With the Q3 earnings cycle nearly complete, the net profit margin for the S&P500 sits at 13.1%.
This would represent not only the highest quarterly reading since Q2 202, but a level higher than all readings since at least 2009, when FactSet began tracking the data. That’s a long time!
This quarter also marks the seventh consecutive quarter of margin expansion. Six of eleven sectors are showing year-over-year improvement led by:
- Utilities: 17.2% vs. 14.8%
- Financials: 20.2% vs. 17%
- Tech: 27.7% vs. 17%
Margins aren’t just holding up, they’re widening across multiple sectors.
Final Course
Analysts expect profit growth to accelerate further. Even with tougher quarterly comps ahead, annual profit margins in the S&P500 are expected to close 2025 at 13.3% and accelerate to 14.2% in 2026:
The margin expansion is meaningful. That’s important because margin expansion fuels more than just earnings growth. Stronger profitability boosts free cash flow, enabling companies to:
- Raise dividends.
- Increase share buybacks.
- Reinforce balance sheets.
- Reinvest for long-term growth.
Stronger margins strengthen the entire ecosystem.
Putting it all together
The U.S. corporate profit engine is alive and well, continuing to deliver steady earnings growth, positive surprise relative to expectations, and incrementally improving profitability. This Thanksgiving, raise your turkey leg to corporate earnings, the underlying force powering long-term growth behind the scenes.
From our family to yours, wishing you a Happy Thanksgiving.
Related: Understanding Risk and Reward in Fixed Income Investing
Sources: FactSet, LSEG I/B/E/S, Yardeni Research