These underdogs are a big reason why S&P 500 profit growth is the fastest in nearly 5 years
The headlines have focused on AI titans and mega-cap tech, but the story behind the fastest S&P 500 profit growth in nearly five years is broader—and more surprising—than many realize. Beneath the surface, a set of long-ignored sectors has swung from laggards to leaders, delivering margin expansions, cleaner balance sheets, and positive operating leverage just as rate pressures ease and demand normalizes. The result: earnings breadth is improving, and a sizable share of incremental profit growth is coming from places few investors were overweight a year ago.
What changed? Three powerful shifts converged:
– The rate shock faded. Stabilizing inflation and the prospect of policy easing lifted duration-sensitive sectors and reduced the drag from rising interest expense.
– Inventory and pricing cycles turned. After two years of destocking and margin compression, many “old economy” industries regained pricing power or saw volumes normalize.
– AI’s second-order effects arrived. Demand for power, data centers, connectivity, and industrial capacity has begun to ripple through utilities, real estate infrastructure, and select industrials.
Here are the underdogs punching above their weight.
Utilities: from bond proxies to AI infrastructure
For much of the past decade, utilities looked like sleepy income stocks tethered to interest rates. Today, they are at the epicenter of the AI buildout and electrification wave.
– Demand tailwinds. Data centers, high-performance computing, and electrification are lifting long-term load growth assumptions after years of flat demand. That supports larger regulated capital expenditure plans and higher rate bases, a direct driver of earnings for many utilities.
– Better mix and policy support. Merchant generators and nuclear-heavy operators benefit from firmer power prices and supportive policy incentives, including production tax credits for zero-carbon generation. That expands margins and reduces earnings volatility.
– Cost of capital relief. Stabilizing yields matter in a capital-intensive sector. While the benefits phase in gradually, a steadier rate backdrop improves the math on new projects and reduces headwinds for dividend coverage.
Translation: utilities are no longer just “bond proxies.” They are capacity providers in an AI-first economy, with more visible multi-year earnings trajectories than they have had in a long time.
Real estate infrastructure: the quiet beneficiaries of digital demand
Real estate as a whole is still working through higher funding costs, but certain niches are thriving.
– Data center REITs. Tight supply, rising power constraints, and surging AI workloads have driven stronger pricing and pre-leasing. Power—more than square footage—is the gating factor, and operators able to secure megawatts are earning returns well above mid-cycle norms.
– Tower REITs and fiber. As traffic grows and edge computing expands, carrier activity and lease amendments support steadier organic growth than many expected. Contracted escalators, plus moderating churn, are stabilizing margins.
– Industrial/logistics. After a post-pandemic cooldown, supply is normalizing and rent spreads remain positive in key coastal and gateway markets, underpinning cash flows even as new deliveries ebb.
These real estate subsectors were hit hard by the rate reset. Now, with fundamentals improving and capital markets reopening, they’re contributing more meaningfully to index-level profit growth.
Financials: capital markets and insurers step back into the ring
Not long ago, investors braced for credit losses and fee compression. Instead, the sector is enjoying a cyclical recovery in activity and a structural lift from higher-for-longer yields.
– Investment banks and asset managers. Reopened IPO and M&A pipelines, tighter spreads, and robust secondary volumes have revived fee pools. Operating leverage is powerful after cost cuts and technology investments made during the slowdown.
– Property and casualty insurers. A hard pricing market, better underwriting discipline, and improved investment income have driven margin expansion. Catastrophe exposure remains a swing factor, but core profitability has improved.
– Regional and large banks. While net interest margins are no longer expanding broadly, deposit costs are stabilizing. Fee income and normalized provisioning are cushioning earnings, and capital ratios are strong.
The sector’s profit recovery lacks the splash of AI, but in dollar terms it’s material—especially because financials remain one of the S&P’s heavier-weighted groups.
Industrials and aerospace: backlogs meet better execution
Industrials spent much of the past two years untangling supply chains and working through order backlogs. The payoff is arriving now.
– Aerospace and defense. Commercial engine services, aftermarket parts, and defense backlogs are supporting multi-year growth with high incremental margins. Execution has improved, and pricing power in services remains firm.
– Factory automation and electrification. Investment in grid upgrades, EV supply chains, and efficiency tools is strengthening orders in select end markets. Even modest volume growth is delivering outsized profit gains thanks to cost discipline.
– Transportation. Freight markets are stabilizing from a difficult trough; for well-run operators, pricing and mix improvements are flowing through.
After years of being under-owned, select industrials are once again generating dependable free cash flow—and it’s showing up in index earnings.
Energy and materials: less glamour, more cash
Commodity prices haven’t needed to soar for these sectors to matter.
– Refiners and energy infrastructure. Solid crack spreads and disciplined capacity additions have supported robust downstream earnings. Midstream assets with volume growth and inflation-linked contracts are quietly compounding.
– Specialty chemicals and packaging. Destocking is largely behind them in many categories, exposing operating leverage as volumes normalize. Pricing is holding better than feared in specialties with niche applications.
– Copper and critical minerals. Structural deficits and energy-transition demand are lifting realized prices and project pipelines, even if quarter-to-quarter results remain choppy.
These groups are still cyclical, but they have been managed with greater capital discipline than in prior cycles, producing steadier earnings and buyback capacity.
Margins, not just revenues, are doing the heavy lifting
Revenue growth across the index is healthy but not explosive. The bigger story is margin repair:
– Input costs have eased from peak inflation, yet much of the price increases companies pushed through have stuck, widening gross margins.
– Productivity and automation initiatives launched during the supply-chain crisis are now delivering savings.
– Interest expense growth has plateaued with the rate cycle, and refinancing windows have reopened.
This cocktail of easing costs, steady pricing, and better operating leverage is exactly what under-owned sectors needed to re-rate their earnings power.
Why this breadth matters
– Durability. Profit cycles are stronger when multiple engines are running. Tech earnings can still lead, but the index is less vulnerable when utilities, financials, industrials, and select real assets are also compounding.
– Capex flywheel. AI’s benefits are cascading into power, grid, cooling, logistics, and connectivity—a multi-year capital cycle that supports old-economy profits.
– Valuation balance. With more sectors contributing, investors have alternatives to crowded trades, which can lower index-level risk if leadership rotates.
Risks to watch
– Rate path and credit. A stickier inflation path or renewed rate volatility would re-tighten financial conditions, particularly for capital-intensive or leveraged business models.
– Power and permitting bottlenecks. Utilities and data centers rely on timely interconnections and regulatory approvals; delays could push projects to the right and crimp near-term growth.
– Geopolitics and commodities. Energy and materials remain exposed to supply shocks; aerospace supply chains are still fragile.
– Pricing durability. As volumes normalize, watch for competitive behavior that could nibble at margins in chemicals, packaging, and transportation.
Investor takeaway: don’t sleep on the second-order winners
The fastest S&P 500 profit growth in nearly five years isn’t solely a Big Tech story. It’s a breadth story—powered by utilities turned AI enablers, real estate infrastructure with pricing power, a revitalized financial complex, and industrials finally harvesting years of backlog and efficiency work. If you’ve been underweight these “old” sectors, the earnings tape suggests it’s time to revisit the thesis list.
What to do now
– Map AI’s downstream needs. Own the enablers: power, grid equipment, data center capacity, connectivity, and cooling.
– Favor proven operating leverage. Look for businesses that expanded margins without heroic revenue growth; that efficiency is more repeatable.
– Lean into capital discipline. In cyclical sectors, prioritize firms with credible return frameworks, low break-evens, and balanced payout policies.
– Watch the revisions. Follow estimate revisions breadth, not just headline beats. Sustained upward revisions outside mega-cap tech are the tell that breadth is real.
Underdogs don’t stay underdogs forever. In this phase of the cycle, they’re a big reason index-level profits are breaking out—and they may keep surprising on the upside longer than consensus expects.
