Week Ending: August 28, 2026
Profits Of Boom
Corporate Profits Before Taxes* As A Share Of Nominal GDP
Source: Bureau of Economic Analysis
*With inventory valuation and capital consumption adjustments
AI-related capital expenditures continue to power U.S. growth and trade. Skeptical colleagues wondered whether revenues would ever justify the spend. As if on cue, this week's Q2 U.S. GDP update showed that pre-tax corporate profits adjusted for inventory valuation and capital consumption tallied $4.83 trillion in the second quarter, up 22.8%, or almost $900 billion, from a year earlier. Corporate profits now account for 14.9% of nominal GDP, the highest share in data dating back to 1947, meaning that, in profitability terms, the current era outshines every "golden age" you've heard of since World War II. We'll get more industry-level details later, but we can guess where the growth is coming from. Nvidia reported quarterly revenue of $96.2 billion this week, up 106% from a year ago, with over 90% of revenue coming from its data center segment. In addition, the top three hyperscalers’ cloud revenue growth rates are running at their fastest clip since 2021, with a swelling backlog, meaning demand keeps outpacing supply. With revenues up, analysts now expect even more capex in 2027. Of course, skeptics will say one more quarter of good profit doesn’t mean it will continue. Still, far from a bust, Q2 was a profit boom.
Highlights of the Week:
High Yield: High yield spreads held near recent levels this week despite broader rate volatility, suggesting investors are distinguishing between rate and credit risk. Against a backdrop of low defaults and solid issuer fundamentals, we believe the asset class continues to offer compelling carry for investors who can look past the noise.
Corporates: This week finally saw a slowdown on the new-issue front, with just $6 billion priced, bringing year-to-date totals to $1.49 trillion. Investment-grade corporate spreads have tightened two basis points on the week to an option-adjusted spread of 78 basis points, now flat year-to-date. Investors are at the ready for the expected heavy September new issue calendar.
Municipals: For the week ending August 26th, LSEG Lipper reported $1.4 billion in inflows into weekly-reporting municipal funds, extending the positive streak to 19 consecutive weeks. This marked a notable pickup from the prior two weeks, with flows running at 1.4 times the 25-week average. Demand was primarily driven by exchange-traded funds (ETFs), which accounted for $1.2 billion, while open-end funds added $236 million. Year-to-date inflows now total $67 billion, the second-highest level on record for the comparable period, behind only 2021, which saw $75.6 billion.
Equities: The U.S. equity market posted positive returns for the week, supported by strong corporate earnings, particularly among mega-cap technology companies. From a sector perspective, performance was mixed, with technology, communications, and financials the best performers, while energy, health care, and industrials were the market laggards.
Securitized Products: Mortgage rates have stabilized between 6.5% and 6.7% over the past three months, resulting in steady prepayment speeds. The reduction in rate volatility has led to a marginal tightening of spreads.
Disclosure: This material reflects the firm’s current opinion and is subject to change without notice. Sources for the material contained herein are deemed reliable but cannot be guaranteed.
