These charts show why stocks keep rallying. Profit margins are the highest on record

• Alphabet and Amazon are the largest contributors to record margins, with Alphabet reporting 34% operating margin and Amazon posting 13.7% operating margin in Q2, both up year-over-year
• Even excluding Alphabet and Amazon, the S&P 500 margin stands at 15%, still a record high since 2009, indicating broad-based strength
• Eight of 11 S&P 500 sectors show improved margins versus a year ago, led by technology, communication services, consumer discretionary and energy, though competitive pressure from new entrants poses potential future risk to tech margins

Summary: Record Corporate Profit Margins Fuel Stock Market Rally

Key Metrics:

U.S. corporate profit margins have reached historic highs, with the S&P 500's blended net profit margin hitting 16.9% in Q2, significantly above the five-year average of 12.4%. This represents the highest level since FactSet began tracking the metric in 2009, up from 14.8% in Q1 and 12.9% year-over-year.

Leading Companies:

Alphabet and Amazon are the largest contributors to the index's record margins. Alphabet reported a 34% operating margin in Q2 (up from 32% year-over-year), with substantial gains from its Anthropic investment. Amazon posted a 13.7% operating margin, up from 11.4% a year earlier. Even excluding these tech giants, the S&P 500 margin stands at an impressive 15%, also a record.

Sector Performance:

Eight of eleven S&P 500 sectors report higher margins than last year, led by technology, communication services, consumer discretionary, and energy. Technology companies particularly benefit from asset-light business models that allow efficient scaling without proportionate cost increases.

Market Implications:

Strong demand and operating leverage enable companies to convert more revenue into profit. Vanguard economist Adam Schickling notes that busy firms operate more efficiently, driving higher margins. However, he warns of potential risks as increased competition and new entrants in the technology sector could pressure future margins.

The record profitability provides fundamental support for the ongoing stock market rally, demonstrating strong corporate performance beyond just revenue growth.