THE ECONOMIST: Nvidia, Nike and major American companies face rising costs and a deepening margin squeeze

Is it that time in chief executives’ calendars when they start asking ChatGPT to draft their end-of-year memos. If they run an American company, the artificially intelligent speechwriter has plenty of boosterish material to work with.

Those bosses have just presented what were generally stonking quarterly results. Sure, being Jensen Huang or Sundar Pichai helps. But you do not have to run Nvidia, Alphabet or another “magnificent seven” tech giant to feel smug.

Among America’s 1500 largest firms by market value, the typical non-financial one increased both its sales and operating profit by 6 per cent in the three months from July to September, compared with the same period in 2024.

In a year knocked hither and thither by business-unfriendly uncertainty — over tariffs, supply chains, inflation, consumer sentiment, interest rates and so on — this sounds like a chatbot’s hallucination. Yet it is verifiably true.

And, if investment banks busily publishing their outlooks for 2026 are to be believed, it will remain so. Deutsche Bank expects growth in total net profit per share for the S&P 500 index, which is made up of the biggest of American big business, to accelerate to 14 per cent, up from 10 per cent this year.

Morgan Stanley agrees, and reckons that America Inc will maintain this blistering pace in 2027.

Nearly half these extra profits will come courtesy of technology and media companies, and 14 per cent from finance.

But most other sectors will chip in, too, as the Federal Reserve makes money cheaper, tariff guesswork eases, tax cuts for households and businesses kick in, and American economic exceptionalism stays intact. A CEO might not need ChatGPT — that memo writes itself.

If a punctilious boss wished to include a footnote of caution below the main text of cheer, this would discuss margins.

Over the past 12 months sales grew year on year at 865 American companies among the 1150 of the 1500 biggest that have reported their latest results (and are not in finance). Yet at 394 of these, the cost of goods sold rose faster, squeezing margins.

Moreover, across four of the ten main industry groups (discretionary consumer goods, energy, industrials and materials) sales, general and administrative costs, a category which encompasses most white-collar compensation, outpaced revenue. In the first nine months of 2025 median return on capital fell year on year in seven sectors.

Executives from General Motors, Nike and Starbucks, among others, fielded probing questions about profitability during their companies’ latest earnings calls with analysts.

The only blemish on Nvidia’s quarterly report was a contraction in its margins. In the 12 months to late October the $US4 trillion ($6t) chipmaker’s gross, operating and net profits tightened by six, four and three percentage points as a share of sales, relative to a year ago.

Some costs are out of companies’ hands. There is, for instance, little that bosses can do about import levies, besides pleading with foreign suppliers to share some of the pain by lowering their prices.

Failing that, firms can lobby the government for exemptions and pray for the Supreme Court to strike down some of Donald Trump’s new duties. Either way, they are at the mercy of a higher power.

Businesses enjoy more agency lower down the income statement.

Take the wage bill. Of the 23 companies with a market capitalisation of $US10 billion or more that have recorded a year-on-year decline in gross margins of over four percentage points, at least seven have announced lay-offs this year.

This group includes household names such as Mondelez, Intel and Pfizer, respectively pedlars of biscuits, chips (the silicon kind) and drugs.

In addition to firing staff, companies can look for ways to make those who remain more productive.

Over the past two years revenue per employee — one gauge of productivity — has grown more slowly than consumer prices at 630 companies in our sample of 1150. In only three sectors (information technology, health care and real estate) has the median business got better on this measure.

In time, productivity-enhancing AI will help. But in the short term, companies’ adoption of it has been lacklustre. In order to juice margins, some bosses may also be tempted to cut back on the investments needed to grow their businesses.

Seven of the ten non-financial sectors spent less on research and development (R&D), as a share of revenue, in the past four quarters than the year before.

Nearly half the firms in the S&P 500 are reducing their capital spending, which shows up in the income statement as a lower depreciation expense.

Yet the profits produced by cutting these costs may prove to be illusory, if doing so makes it harder to dream up and manufacture fresh products in the future.

Thinner margins are not always a problem for the bottom line so long as the top line keeps growing. This is the case for Nvidia, whose sales swell at an annual rate of 60 per cent or so quarter after quarter.

Across America Inc as a whole, revenue growth is less stratospheric but still healthy. For the S&P 500 it is forecast to stay around 7 per cent in 2026, according to FactSet, a data provider. (For smaller companies, which analysts often ignore in their projections, the outlook for growth is hazier.)

Hacking away at growth-generating investments in order to boost profits today would, for many companies, be a mistake.

Margin cull

The pressure on America Inc’s margins may well ease in 2026. Whatever the justices make of presidential tariff authority, import duties seem likely to dip.

A big tax bill Mr Trump signed into law this year brings favourable changes to the expensing of R&D, capital spending and other investments. Yet the American economy may also eventually slow. If CEOs put off their margin question until then, it will no longer be of marginal importance.