US Stocks: Margin Math Tests the Earnings Story

24 July 2026

3 min read

The S&P 500 is heading for a bumper earnings year, but what’s been driving the growth?

US earnings are set to grow briskly in 2026, but much of the expected gains are being driven by expanding profit margins that may be hard to sustain. Equity investors should ask whether portfolios are exposed to businesses with durable demand and profitable reinvestment—or merely a favorable margin cycle.

Companies can lift earnings either by growing revenues or by widening profit margins. Both help the bottom line, but they don’t tell the same story: higher revenue usually reflects recurring demand, while margin expansion often depends on efficiencies that may be harder to repeat. One is an engine, the other a tailwind.

Revenues Take a Backseat

This year, the split is unusually lopsided. According to consensus estimates, US earnings are poised to advance by 24% in 2026, a pace that typically signals a booming economy and surging demand. Yet, revenues are expected to grow at less than half that rate, accounting for only 9.6 percentage points of expected earnings-per-share (EPS) growth (Display). Meanwhile, profit margins are fueling more than half of earnings growth and are headed toward their highest level since 2021 during the strong post-pandemic rebound. History suggests that revenues have typically been the primary driver of earnings growth versus margin expansion.

Profit Margin Expansion Is Driving S&P 500 Earnings Growth

Two charts illustrate the decomposition of US earnings growth by revenue growth and margin expansion based on 2026 estimates and the historical average from 1991 to 2025.

Past performance does not guarantee future results.
Margin expansion refers to operating margins.
BTL: taxes, interest, buybacks, other; EPS: earnings-per-share
*Numbers may not sum to 100 due to rounding
As of June 30, 2026
Source: FactSet, S&P and AllianceBernstein (AB)

Why the Source of Growth Matters

Margins cannot expand forever. There’s a natural ceiling to the efficiencies that a company can generate by cutting costs, streamlining operations or reaping the benefits of a favorable tax or rate environment. Since these moves usually provide a one-time step up in profitability, they often don’t repeat, so they can’t compound. By contrast, revenue gains—driven by increasing unit sales, attracting more customers or raising prices—can recur year after year when backed by real demand and strategic reinvestment.

That’s the crux of our concern. When earnings growth leans so heavily on margins, it’s drawing from a finite well. Put differently, the earnings outlook rests on a demanding assumption: that margins can expand further from record levels.

Echoes of Earlier Cycles

We’ve seen this before. In the late 1990s, in 2007 and in 2018, peak profit margins preceded stretches of earnings disappointment. Each time, conventional wisdom assumed that a structural change had created a permanently higher margin plateau, yet gravity eventually reasserted itself. Current consensus estimates suggest margins will contribute less to earnings in the coming years—similar to previous episodes following years of outsized margin contribution. (Display). The reason? We believe abnormally high profits tend to attract competition and revert to the mean over time as high returns invite imitation, which compresses margins.

High Margins Tend to Revert to the Mean as Earnings Decelerate

S&P 500 Earnings Decomposition After Peak Margin Years

Past performance does not guarantee future results.
BTL: taxes, interest, buybacks, other; EPS: earnings-per-share
Margin expansion refers to operating margins. Based on five years in which margins contributed more to EPS growth than revenues between 1991 and 2025. Numbers may not sum to 100 due to rounding.
As of June 30, 2026
Source: FactSet, S&P and AB

To be sure, today’s higher margins may reflect a genuine, lasting shift toward asset-light software and technology businesses that earn more on each dollar of sales, alongside years of lower interest and tax burdens. However, as we see it, much of the structural shift appears to be already baked into today’s margins. Although we don’t expect margins to fall, we think it’s hard to make a convincing case for further margin expansion from here.

Concentrated Markets Complicate the Story

In 2026, the market’s margin and earnings strength remains concentrated in a few of the largest AI infrastructure companies, including semiconductor and memory manufacturers. Strip out other big contributors, and the growth advantage of the mega-cap leaders over the rest of the index narrows considerably. When a few names carry the numbers, the index can look healthier—or weaker—than its underlying constituents.

These trends don’t necessarily point to trouble. Margins can stay elevated for longer than expected as they have for over a decade. And record profitability is a testament to a highly efficient and adaptable corporate America.

Look for Companies with Genuine Growth Drivers

But we do think investors should pay closer attention to the sources of this year’s earnings growth. Equity portfolio managers should ask whether the businesses held are growing because demand is genuinely expanding and being reinvested well, or mainly because margins have drifted higher.

If margins simply hold flat rather than climb, this year’s headline growth would look much more modest. In a market paying premium valuations for that growth, the margin math deserves scrutiny. The bigger opportunity, we think, is to identify quality businesses whose earnings can compound—even if margins stop doing the heavy lifting.

The views expressed herein do not constitute research, investment advice or trade recommendations, do not necessarily represent the views of all AB portfolio-management teams and are subject to change over time.

About the Authors

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