Widening Operating Margins Are Boosting Earnings, for Now

Second-quarter 2026 earnings season has been a good one so far. With reports in for more than three-quarters of the S&P 500 index companies, the LSEG I/B/E/S blended estimate shows second-quarter 2026 earnings growing 49.6% year over year. Revenues are up 15.1%. (Both are blended growth rates, which include reported and estimated numbers.)

In between those two numbers are expanding profit margins. Michael Walker of investment firm AllianceBernstein said in recent note that “profit margins are fueling more than half of [this year’s] earnings growth.” According to Walker’s analysis, widening operating margins account for more than half of this year’s projected 24.0% growth in S&P 500 earnings (as of June 30, 2026). Below is his breakdown of earnings growth contributors.

• Revenue growth: 9.6 percentage points
• Operating margin expansion: 13.5 percentage points
• Taxes, interest, buybacks and other: 0.9 percentage points

Walker’s numbers appear to use market-capitalization-weighted estimates. This matters because the largest companies have the biggest influence in a market-cap weighted index. Notably, switching to equal weighting does not materially change the margin expansion story, as you can see in the chart below.

No single sector within the S&P 500 has continuously increased its operating margins since 2021—not even information technology. Several have both enjoyed rising margins for three consecutive years and have higher operating margins on a trailing 12-month basis. It is this breadth that is leading to the S&P 500’s overall wider margins.

We ran the same analysis on the broader S&P Composite 1500 index. This index combines the S&P 500, the S&P MidCap 400 index and the S&P SmallCap 600 index. The current streak of rising operating margins started one year later than it did for the S&P 500.

Widening Margins Are Good, But …

Wider profit margins occur when a company earns more on each dollar of revenue it receives. As shareholders, we want profit margins to increase in a sustainable way relative to the cyclicality of the business we are investing in.

However, margins can only go so high. Companies have costs beyond raw materials, such as marketing, staffing and other operational costs. There is a limit to how much these costs can be cut. As companies approach that limit, additional streamlining produces diminishing gains. Even gains from tax cuts—which tend to show up more in net margins than operating margins—do not lead to sustained margin expansion.

Ultimately, companies need revenue growth to increase earnings. The ideal company is one that can grow revenues at a good pace while sustaining wide margins relative to its industry or sector peers. Such a good mix is difficult to sustain because wide margins attract competitors who are willing to accept lower levels of profitability in order to gain market share.

This is a point Walker makes. The peak operating profit margins realized in the late 1990s, 2007 and 2018 “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.”

We could argue about the inclusion of 2007 in Walker’s commentary, but the broader point is valid: Sustainable earnings growth requires more than just rising margins. This is why investors should spend a little time each quarter determining the key drivers behind the company’s revenues and what the company itself is doing to increase revenues in a profitable manner.