Decent Macro Environment for Corporate Profits

Indiana Trust Wealth Management
Investment Advisory Services
by Clayton T. Bill, CFA
Vice President, Director of Investment Advisory Services

• The U.S. equity market, represented by the S&P 500 index, rose 1.2% for the week.
• The macroeconomic environment, characterized by massive capital expenditures on AI and a structural federal government deficit, is providing tailwinds for US corporate profits.

It is rather difficult to tell what direction the US economy is heading. While the job market appears to be cooling, retail sales have been strong and business surveys show optimism. The Atlanta Fed publishes a running “nowcast” of quarterly GDP growth based on current data, and its estimate for third quarter economic growth stands at a robust 3.3%.

Through all the varying economic data releases in recent weeks, the US stock market has been generally looking past bad news and has been rallying. The large-cap S&P 500, Dow, and Nasdaq 100 indexes, along with the small-cap Russell 2000 index, hit new all-time highs this week. It has been almost five years since those four indexes all reached new heights at the same time.

Strong trends across the sources of corporate profits at the macro-level could help explain why markets have been pushing higher. Business investment is a critical source of profits, and investment in AI is booming. The major AI hyperscalers (Microsoft, Google, and the other usual suspects) are plowing massive cash flows into their infrastructures. In the second quarter, capital expenditure on AI for the hyperscalers hit a stratospheric 72% of their operating cash flow.

Source: Bank of America Global Research, September 2025

One hyperscaler’s spending is another company’s income. Bespoke Investment Group refers to companies that supply electricity, generators, and construction services to the hyperscaler buildout as the “AI Picks and Shovels”. Bespoke’s basket of AI Picks and Shovels stocks, which includes names such as Constellation Energy and Eaton, is up 60% since last October.

Another, less-discussed macroeconomic support for corporate profits over the last several years has been the US federal government budget deficit. Any discussion of the federal deficit involves politics, and there is always healthy debate about government spending and taxing.

Nevertheless, the federal deficit is a source of corporate profits at the macro-level. The deficit over the last fiscal year (which for the US government runs through September) is projected to be $1.9 trillion, which would rank as the third largest budget deficit in US history.[1] Given that the federal budget deficit seems to have difficult-to-change, structural elements, investors may be forgiven for expecting deficits to continue, despite rhetoric from both sides of the aisle.