What do the charts show?
The chart tracks the components of the Kalecki–Levy profit equation since 1929. This equation is a macroeconomic accounting identity that explains the sources of aggregate corporate profits in the US economy. To allow comparison over a long historical period, all figures are expressed as a percentage of gross national product. Bars above 0% represent positive contributions to aggregate profits, while bars below 0% represent drags.
The breakdown shown in the chart is an extension and rearrangement of Kalecki and Levy’s core principle: that all newly accumulated wealth in an economy (savings) must equal the new wealth that the economy creates (investment). The chart shows how these components, or profit sources, sum to the wealth accumulated by the business sector, after subtracting the wealth accumulated by other sectors, primarily government and households.
Viewed this way, corporate profits are not simply a function of firm-level efficiency or competitiveness, but the outcome of economy wide financial flows between sectors.
Why this is important
The Kalecki–Levy profit equation provides a powerful framework for understanding the impact of fiscal and monetary policy on aggregate profits. The long term decline in corporate tax rates, for example, has mechanically supported higher corporate profits, and the equation shows exactly how this effect operates. Had the US government reduced spending to offset lower tax revenues, the two effects would have largely cancelled out, leaving aggregate profits unchanged. Instead, governments have persistently run budget deficits, funded through additional borrowing. Those deficits have flowed back into the corporate sector via transfer payments and consumer spending on goods and services. As a result, budget deficits have become a major driver of aggregate profits over the past 15 years.
A useful extension of the Kalecki–Levy framework is to focus more closely on the net investment component. While higher investment always adds to aggregate profits ex post, it is the quality of investment that determines whether those profits are sustainable. Net investment captures spending that genuinely expands the economy’s productive capacity, such as new plant, equipment, software, and logistics systems. When this investment aligns with underlying demand and is financed by real savings rather than credit expansion, it supports durable profit growth. By contrast, malinvestment driven by loose financial conditions or inflated demand expectations can temporarily boost profits while eroding their long term foundations. In this sense, net investment is not just an accounting item, but a forward looking signal of profit durability.
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Policy decisions contributed to inflation fears and bond sell-offs, with markets reacting to supply shocks.
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Start of Q1 earnings season (e.g. major banks) became a focal point amid geopolitical volatility.
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Growing criticism from allies (including the UK) over US foreign policy’s economic impact.
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Government pushed for closer economic alignment with the EU, especially in trade, energy, and regulation.
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Negotiations launched to mitigate steel tariffs and EV supply-chain rules affecting UK industry.
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IMF praised the UK’s improving fiscal position and deficit reduction path.
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Domestic political tensions rose over perceived “softening Brexit” strategy and regulatory alignment.
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Political shifts (e.g. Hungary election result) raised expectations of unblocking EU funding flows.
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EU preparing new trade and tariff measures, including steel protections targeting global overcapacity.
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Continued fiscal pressures across major economies with rising debt and borrowing costs.
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Diplomatic balancing act with China and the US amid global conflict and trade tensions.
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IMF warned of rising global debt and need for emergency financing (~$40bn).
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China’s reliance on Iranian crude leaves it vulnerable to US blockade risks, while broader energy disruption is further straining already fragile global supply chains.
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Geopolitically, China continued navigating tensions with US and deepening ties with others (incl. UK earlier in 2026).
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Japanese equities outperformed globally, benefiting from shifting risk sentiment early in the week.
