The market says we're booming. Large parts of the economy would like a second opinion.
One of the most striking features of today’s market is that record profit margins are doing much of the heavy lifting. Is this AI productivity gains affecting economy-wide measures of economic performance?
S&P 500 earnings are projected to grow nearly 24% in 2026, with more than half of that growth coming from expanding profit margins rather than revenue growth alone. At the same time, profit margins are expected to reach roughly 15%, among the highest levels on record. Q1 profit margins high the highest recorded level at 15.9%.
But beneath the surface, the economy looks increasingly K-shaped. Corporate profits are claiming a larger share of national income while labor compensation has been trending lower. Meanwhile, much of the recent growth in wealth has accrued to higher-income households, creating a widening gap between those benefiting from rising asset prices and those relying primarily on wages.
The AI boom is a major reason for this divergence. Companies tied to AI infrastructure, semiconductors, software, and data centers continue to see strong capital spending and productivity gains. Yet many non-AI sectors are facing slower growth, margin pressure, and weaker demand. Imagine what a recession we would be in without AI's impact on the economy!
This helps explain why the stock market can be hitting new highs while many consumers and businesses describe a very different economic reality.
The key question for investors is whether AI-driven productivity gains continue to spread across the broader economy, or will the gap between the winners and everyone else continue to widen.
Earnings, Margins, and K-Shaped - JPMorgan
The market says we're booming. Large parts of the economy would like a second opinion.
