Excess Fear Over ‘Excess’ Profits

Late GDP revisions are usually a snoozefest, and the third report of Q1 GDP was no different, revised up a smidge as lower-than-first-reported imports and a slight boost to investment growth offset a downward revision in consumer spending. That gives us 2.1% annualized growth with the private sector still growing in line with recent trends, and all of it very backward-looking as we stare down Q2’s end.^[i] But the report also revised Q1 corporate profits significantly higher, causing a fresh wave of … fear. Drawing on a nearly 80 year-old report, some coverage warned profits may be at an excessive and historically dangerous share of private sector income. But we went antiquing, read the report and found a false fear for stocks.

The measure in question is nonfinancial after-tax corporate profits as a percentage of nonfinancial gross value added—basically, profit margins. This measure hit 14.4% in Q1, extending the post-COVID economic expansion’s claim as the most profitable one for US businesses since … (ominous pause) … 1929.^[ii] If you have been wondering what stocks have been pricing in these last couple years, this is it. It should be cause for cheer, a celebration of this bull market’s fundamental support. But Bloomberg went in a different direction, one that intrigued the history nerds in us, digging up the Truman Administration’s economic report to Congress in 1948, when margins were also starting to flirt with 1929 highs.

They note: “Some of Truman’s advisers noticed how much money US businesses were making back then – and it was something they viewed with alarm. The Economic Report of the President for 1948 said the share of profits in private-sector national income had risen to 9.4% the previous year. That was ‘dangerously close to the excessive ratio of 10.2% in 1929,’ they observed. ‘As need hardly be mentioned, 1929 was a year of such abnormality of economic relationships that it was followed by one of the worst depressions in recorded economic history.’”^[iii] The article notes the implicit forecast here proved wrong, with no depression ensuing (though a recession did run from November 1948 through October 1949), but that today’s “excessive” profits may deserve some skepticism anyway.

When we see claims like this, we always get hungry for logic and context. So we dove in and read not just this report—the “Report of the Joint Committee on the Economic Report on the January 1948 Economic Report of the President”—but the full January 1948 report underlying it. For those who don’t speak Congress, the first is the congressional joint committee’s opinions on the president’s economic report to Congress, and the second is the report itself.

The President’s report is the dryer of the two and doesn’t outright call 1948’s high margins as a potential depression trigger. Instead, it argues these high profits are the ill-gotten fruit of inflation and price gouging and prove 1946’s repeal of an excess profits tax was a mistake: “Although a portion of the large profits earned during 1947 merely compensated for changes in prices, profits on the whole were above the levels necessary to furnish incentives and funds for the expansion of business and to promote the sustained health of the economy.”^[iv] Accordingly, the report recommended curbing inflation by raising corporate taxes, giving households a “cost-of-living tax credit,” rationing credit and adopting wage price controls.

The Congressional Joint Committee’s report took these findings and ran with them in typically overwrought fashion (politicians will always be politicians, we guess). Reading through it, we get the distinct impression the connect-the-dots with 1929 was aimed at scaring their peers into adopting the administration’s fiscal policy recommendations. After fleshing the comparison out, they intoned:

“Such trends are unhealthy and ought not to remain unchecked. An increase in taxes on profits will dampen both excessive business spending and inflation. A reduction in taxes, especially in the upper income brackets, doubly makes matters worse. Since such high incomes in large part come from dividends and other corporate disbursements, tax reduction in boom times only adds to conjectural, fortuitous gains, and pours more fuel on the fires of inflation.”

From there, they argued forcefully for corporate tax hikes, price controls, credit controls and rationing, which they laughably claim reduce inflation “by forcing people to save in slowing down the rate of bank credit expansion.”^[v]

In other words, this scary 1929 comparison? Entirely political, contrived to achieve a political result. Not a legitimate economic forecast, just a political game of correlation without causation. It is a tried-and-true trick that has been in the playbook since the dawn of politics.

So no, the Truman Administration and Congress’s posturing 78 years ago isn’t reason to be bearish on high corporate profits now. They were making political points without solid economic underpinning. Their arguments were all sociological, full of unsupported generalizations, never explaining in solid economic terms why higher profit margins would be bad for the economy. It was all vibes.

Instead of getting sucked into that rhetoric, we recommend looking at the entire history of profit margins and seeing what trends might be useful to assessing the present. So Exhibit 1 presents quarterly margins since data start in 1947.

Exhibit 1: Quarterly US Profit Margins

Source: Federal Reserve Bank of St. Louis, as of 6/25/2026. Nonfinancial After-Tax Corporate Profits (With Inventory and Capital Consumption Adjustments) and Nonfinancial Corporate Business Gross Value Added, Q1 1947 – Q1 2026.

What can we glean? Throughout the 20^th and early 21^st century, margins would generally rise early in an expansion, peak toward the middle and decline as the expansion aged. That broke down in the 2009 – 2020 recession and after COVID lockdowns, with much more variability. The historical trends make sense when you consider how a business cycle generally plays out. Early on, margins expand as businesses reap the fruit of all the cost-cutting they undertook in the last recession. Then they reach the end of their ability to do more with less, which means more hiring and more investments in future growth. Higher expenditures reduce margins and the expansion goes on until businesses get bloated with unproductive assets and investments, and a recession resets everything. It squeezes out the excess, gets everyone lean and starts the cycle anew.

The problem for anyone using this knowledge to glean an economic forecast from profit margins is this very clearly isn’t a timing tool. There is no consistent point where recessions began historically, either in terms of the level of margins or time since margins’ cyclical peak. The added volatility since 2009 compounds this. You can make fuzzy estimates of where we are in the business cycle, but it won’t tell you when the party will end.

Overall, then, we see today’s tizzy over wide profit margins as a sign this bull market still has pockets of skepticism to counterbalance AI cheer. The wall of worry still has some bricks, with people still looking for reasons to be bearish.