Profits Without Peril: Why Record Earnings Don't Necessarily Mean We're Overheating

In the face of concerns about the durability of the U.S. economic expansion, corporate profits have been broadly robust. In fact, some profit measures are at or near record highs. Figure 1 below shows data from the Bureau of Economic Analysis (BEA) on corporate profits (with inventory valuation and capital consumption adjustments) expressed as a share of gross domestic income (GDI). In the fourth quarter of 2025, this measure reached a record high of 13.9 percent (with data going back to 1947) and remained at 13.9 percent in the first quarter of 2026.

According to the BEA, corporate profits are an important indicator of economic performance, and the long-run history of this series features an interesting statistical regularity. Figure 1 shows that the ratio of corporate profits to GDI has generally tended to decline in the quarters preceding a recession, with the exception of the 2020 pandemic recession and the 1981 "double dip" recession (which was considered by many to be a continuation of the 1980 recession). Assuming this leading indicator property continues to hold, the recent strength in the corporate profit share may be a positive sign for the near-term outlook for economic growth.

If downward movements in the corporate profit share of GDI are a harbinger of recession, does that mean that upward movements are a sign of economic overheating? To determine whether the economy is overheating, we can look at estimates of the output gap: the difference between gross domestic product (GDP) and its maximum sustainable level, also known as potential GDP. Higher values indicate that the economy is performing above its sustainable level, an indication of potential overheating. One well-known estimate of the output gap is produced by the Congressional Budget Office (CBO) and published alongside the CBO's budget and economic forecasts.

Figure 2 below plots the CBO output gap as a share of potential GDP on the left axis (in blue) versus the corporate profit share of GDI on the right axis (in orange). At first glance, there appears to be some relationship between the two measures: In years when the output gap is rising, the corporate profit share also tends to be rising. From 1947 through 2025, the correlation between the two series has been mildly positive at 0.31.

However, Figure 2 also suggests that the relationship between these two variables was much tighter in the first half of the sample compared to the second half. From 1949 through 1984, the correlation between the corporate profit share of GDI and the output gap was extremely high at 0.76. In contrast, from 1985 through 2025, the correlation between these variables has been close to zero.

The lack of a strong relationship may partly explain why we sometimes observe a disconnect in business surveys between perceptions of financial performance and aggregate economic conditions. For example, Figure 3 shows a growing divergence between CFO optimism about the broad economy and about the performance of their own companies in the CFO Survey fielded by Duke University and the Atlanta and Richmond Feds.

The change in the relationship between the output gap and the corporate profit share of GDI may reflect changes in the underlying economic environment over the decades. For example, research by a Federal Reserve Board economist argues that much of the unusually strong growth in corporate profits over the later half of the sample was due to declining interest rates and declining corporate tax rates, trends which may not continue. For now, however, the good news is that recent strong corporate profits do not necessarily raise red flags in terms of the U.S. economy overheating.

Views expressed in this article are those of the author and not necessarily those of the Federal Reserve Bank of Richmond or the Federal Reserve System.