The Big Idea
Corporate profits and pricing power
This material is a Marketing Communication and does not constitute Independent Investment Research.
Corporate profits surged in 2021 and 2022, as businesses in the aggregate managed to expand their margins in the face of severe input cost increases. Profit margins have remained elevated relative to the pre-pandemic trend in recent years, a likely contributor to stubbornly high inflation. The PPI data on wholesale and retail margins suggest that firms may look to further boost their profitability this year, a result that would likely keep inflation well above the Fed’s 2% target.
Corporate profits
As part of the National Income and Product Accounts (NIPA), the Bureau of Economic Analysis (BEA) calculates corporate profits. Ultimately, the main source for these figures are data forwarded from the IRS compiled from corporate income tax returns. However, the tax data are only available with a lag, so the BEA has to extrapolate from the latest available tax figures to create quarterly estimates for the most recent periods. Those quarterly estimates are derived from Census Bureau figures collected from various industries as well as the tabulations from a sample of corporate earnings reports. Thus, the BEA’s corporate profits series should be broadly in line over time with the quarterly shareholder reports that financial markets focus on, but the two do not necessarily have to be entirely consistent.
Recent trends
The BEA’s gauge of corporate profits has generally been robust since the economy reopened after the initial phase of Covid in 2021. In each year beginning in 2021, the annual pace of growth in corporate profits has exceeded the advance in nominal GDP. The two rose at close to the same pace in 2024, then profits took a hit in the first half of 2025, perhaps due in part to the imposition of steep tariffs. Since then, however, corporate profits have surged, posting quarterly increases of 4.5% in the third quarter last year and 6.0% in the fourth—these are not annualized figures—followed by a more modest 0.9% advance in the first quarter this year (Exhibit 1).
Exhibit 1: Corporate profits
Source: BEA.
Profit margin
The BEA also publishes data on how real gross value added for nonfinancial domestic corporations is allocated between costs, taxes, and profits. This allows a look into profit margins, showing after-tax profits as a percentage of the price charged per unit of gross value added for this subset of businesses (Exhibit 2).
Exhibit 2: Nonfinancial domestic corporations profit margin
Source: BEA, Santander US Capital Markets.
Profit margins clearly widened after the pandemic, inching up from a 10% to 12% range to around 14%. When I last examined this data a couple of years ago, I predicted that “getting inflation back to 2% on a sustainable basis will require squeezing profit margins back down to something closer to the pre-pandemic trend.” As you can see, profit margins appear to have settled in at around 14%, substantially higher than the pre-pandemic norm. And, not surprisingly in light of this fact, inflation decelerated from its highs but has not yet come close to returning to the Fed’s 2% target.
Déjà vu?
The fact that businesses were able to markedly expand their profit margins in the wake of the pandemic, at a time when both labor and nonlabor costs were surging, was an extraordinary development. It signaled a significant shift in businesses’ pricing power that contributed to the disastrous surge in inflation during that period.
The corporate sector is facing a vaguely similar situation in 2026. Costs have exploded, reflecting a toxic mix of tariff hikes and, more recently, a severe energy price shock. In the aggregate, businesses, especially those facing consumers, chose to absorb at least some of the tariff-related costs last year, waiting for clarity on a final outcome before going to their customers and asking for higher prices.
Many analysts, including me, expected that there would be a wave of price hikes in early 2026, as companies sought to recover some portion of their higher costs. As a result, the timing of the energy price shock was especially inopportune, as it came at a moment when executives were already focused on passing through input cost increases. The risk is that this will accelerate and perhaps intensify the passthrough of higher energy prices as well.
It is a little early to gain a feel for how this drama will play out, but there is a risk that businesses will attempt to repeat the 2021-2022 playbook and widen their profit margins further, raising prices by enough to recover their costs and then some. It worked once, so firms may go back to the well.
The monthly data from the PPI on wholesale and retail services “prices,” which in reality attempt to measure margins in those industries, are worrisome. Consistent with the prevailing narrative from the business community, margins contracted last year in the wake of the imposition of tariffs. For wholesalers, the PPI margin gauge declined by 2.2% in April 2025 and was then little changed on balance from May through October, rebounding by less than 1%. Similarly, the retail PPI margin measure sagged by 2.5% on balance from June through November.
However, both gauges have rocketed higher over the past several months. The PPI wholesale trade index has jumped by more than 8% over the last six months (through April). Similarly, the retail PPI measure has increased in each of the past five months, a cumulative rise of 7.5%. As a result, relative to a year ago, the PPI data show that wholesale margins have risen by over 9% and retail margins by over 5½% vs. a year ago. To be fair, this is nothing like what happened in 2021, when the PPI wholesale and retail trade figures spiked by 12% and 17%, respectively. Nonetheless, it suggests that Fed officials need to be very concerned that businesses, emboldened by the experience of 2021-2022, intend to test the limits of their pricing power in the wake of another round of significant input cost inflation.
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