It’s official: with the best earnings season since 2010 now essentially over, the numbers are in and S&P 500 profit margins are at an all time high of 11.2%.

And yet, as turmoil spreads abroad, while capacity bottlenecks and rising wage pressures grow domestically, and with business tax cuts now behind us, Goldman Sachs asks if the rapid rise in profit margins can continue.

To answer that question, the bank first looks at corporate profits as a share of GNP, as reported in the national income and product accounts (NIPA), and notes that they have been significantly softer recently than S&P 500 profit margins. As the chart below shows, while NIPA margins exceeded S&P 500 margins until early-2015, they are now 1.25pp below S&P 500 margins.

Furthermore, as seen above, NIPA margins have often led S&P 500 margins. Should we therefore expect weaker S&P 500 margins given the softer recent NIPA margins growth?

The answer, it turns out, is most likely yes: while NIPA data are revised, turns in real-time NIPA margins have often preceded turns in S&P margins. The four S&P “margins recessions” – defined as a decline in the 4-quarter moving average of the profit margin that lasts at least two quarters and features at least a 0.5pp cumulative decline – on record were all preceded by NIPA margin recessions, likely reflecting the higher sensitivity of small firms’ margins to changes in interest rates and wages. However, one key difference with the past is that highly productive superstar firms with significant pricing power now comprise a very large share of S&P profits, but remain a smaller share of NIPA profits.

Why do NIPA profit margins often lead those of the S&P 500?

According to Goldman, the most plausible explanation is that small firms, which make up a larger share of the NIPA sample, have higher sensitivity to changes in interest rates and wage growth. While small businesses rely on short-term, floating-rate bank loans, large firms borrow primarily from public debt markets at fixed rates. Additionally, small firms’ profit margins are also more exposed to faster wage growth, as their payroll costs are a much larger fraction of sales. Firms with sales less than $100M have an average compensation-to-sales share of 23%, compared to only 12% for firms with sales above $100M.