Inflation squeezes margins despite strong earnings beats

US margin pressure is showing up as an inflation story rather than a collapse in demand. S&P 500 margins have been expanding because AI and adjacent names are lifting those margins, but there are still lots of cost pressures out there, including energy prices going back up, wage pressure in a still-tight labor market, tariffs being rebuilt on imports, and power-generation concerns. Even with margins really, really good at 14% and not expected to be compressed to zero, there is some inflation risk and companies will definitely feel some cost pressures. That leaves margins resilient, but rising costs are becoming more important.

The squeeze is not limited to the biggest tech names, because broader earnings growth is still being carried by the rest of the market even as costs rise. MAG 7 drove about 15% earnings growth in Q1, but the 493 stocks, 20% growth, showing support outside the MAG7 and implying that margin pressure is not confined to those leaders. Oil remains a direct margin threat, with the longer oil prices stay higher, that is some concern, and scenarios ranging from $150 a barrel to somewhere between 80 and 100. Carriers also say we do expect that partial inflation to continue, with peak season bringing margin pressure from carrier spend and roughly 12% year-over-year increases, even as the overall market earnings outlook remains supportive outside MAG7 leadership.

The clearest sign of margin erosion overwhelming growth signals came from D-Wave, where the last 12 months operating margin was “Negative 1,373%,” a figure described as “a brutal reality check” as cash burn and dilution overshadowed demand indicators. Even with first-half bookings of $35.5 million and multiple large agreements, the company was “bleeding heavy cash today” with a $73.5 million operating cash burn in the first half, showing how rising expenses can swamp improving commercial traction before it reaches the income statement.

Investors repeatedly treated that mismatch between growth and profitability with caution: D-Wave said on August 6, 2026 that Q2 revenue was exactly $3.08 million, flat year over year and well below the $4.03 million consensus, after which the stock fell 9.3% and forward EPS estimates were cut to negative 39.40 cents. The same pattern appeared across Q3 reports, with StockStory noting, “Hexcel's Q3 Revenue Misses Estimates by $6.4 M as A350 Demand Fuels Growth, Shares Fall,” while Mohawk beat EPS and offset inflation but still posted $2.79 billion of revenue versus a $2.81 billion forecast.

The clearest mechanism is that core operating inputs are rising in large, sticky buckets that revenue cannot immediately dilute. According to Anthropic’s Cost Structure Shifts and Margin Dynamics, compute and infrastructure—chips, data centers, and cloud capacity—was $8.95B, or 55% of revenue in H1 2026, and grew 283% year over year while revenue grew 1,300%; crucially, most compute was ordered in advance so “the cost didn’t move with demand,” leaving a fixed-cost overhang even as sales expanded and limiting the operating leverage that fast top-line growth would normally produce.

That pressure is compounded by labor and distribution expenses that scale up alongside growth rather than falling as a share of it. Personnel reached $3.15B, or 19% of revenue in H1 2026, up 486% year over year, with stock-based compensation rising from “$1.9B… reached $2.19B in H1 2026,” while sales, marketing, and partnerships also hit $3.17B, or 19% of revenue, as fees paid to AWS, Google Cloud, and Azure for selling Claude “grew by $2.7B Y/Y” and “As more customers buy through the clouds, this cost goes up”; the result was GAAP operating margins of -249%, -152%, -224%, -139%, -35%, and only 8% from Q1 2025 through Q2 2026.

The counterargument to a uniform margin squeeze starts with companies that still show clear pricing power and mix benefits. Analog Devices was described as delivering “historic” Q3 2026 results through “une combinaison de trois facteur,” notably “une meiller composition de produis” and “les augmentations de prix,” while Texas Instruments said it “posted revenue of $6.1 billion for the quarter, up 11% sequentially, and a huge 28% year over year” as EPS rose 77% to $2.62, evidence that selected semiconductor names can still convert demand into unusually strong profitability. That same selective-profitability case is reinforced by analysis arguing “The business is already very profitable,” with “LTM gross margin is 67.07%, net margin 33.83%, and ROIC 20.8%,” alongside “FCF over the last 12 months is $439M.”

Management commentary also suggests that execution and end-market mix, not just macro costs, are separating winners from the pack. Texas Instruments said incremental gross margins were “around 90%, well above their long term target range of 75 to 85%,” with CFO Julie Knech citing “higher revenue volume, some pricing improvements and favorable product mix,” while “Industrial was the headline, up more than 40% year over year,” and “data center, up about 95% year over year… nearly doubling, and now 13% of total revenue,” a “massive shift” toward richer demand. Separately, the analysis says “The market prices in a much weaker future than analysts expect,” citing “consensus 5Y EPS growth estimate is 50.0%” and that “CRDO trades at 20.6x forward earnings, a PEG ratio of 0.41,” concluding that not all names are being valued as if margin resilience and mix-driven upside can persist.