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The American economy is telling two very different stories right now.
The S&P 500 posted a 29% year-over-year gain in the first quarter of 2026. Corporate profits are surging. Investors are celebrating. But on Main Streets across the country, small business owners are looking at their books and seeing something else entirely.
For much of this year, small business profitability was negative. It fell 1.3% year-over-year in April — the weakest reading in two years . The cause was clear: fuel costs surged, payroll growth slowed, and margins got squeezed from every direction.
Then, in June, something shifted. For the first time since the start of 2026, small business profitability growth turned positive. It wasn’t a boom. It was a breath.
By July, the picture brightened further. Profits reached their highest level of the year, with the strongest gains in transportation and manufacturing . Small business hiring showed real strength — Bank of America’s alternative hiring indicator was up 21% year-over-year in July.
But here’s what the headline numbers don’t show.
Q2: The Squeeze Before the Turn
April was the low point. Small business profitability fell 1.3% year-over-year — the weakest in two years . Gasoline spending per small business client jumped 31% year-over-year in April. Payroll growth turned negative for the third straight month.
The pressure wasn’t uniform. Firms with under $500K in annual revenue experienced the steepest decline in profitability of any tier. A margin squeeze that a $2 million business can manage for a few quarters can force a $300,000 business into harder decisions much faster .
May brought more of the same. The inflow-to-outflow ratio — a measure of cash flow health — fell across every revenue tier. Producer prices rose 6.5% for the 12 months ending in May, driven by a 23.4% jump in wholesale gasoline prices
By June, the bleeding slowed. Profitability growth turned positive for the first time in 2026. Revenues were growing again — not fast enough to fully offset costs, but enough to stop the decline.
Q3: A Fragile Rebound
July delivered the strongest signal yet. Small business profits hit their highest level in over a year. Transportation and manufacturing firms saw the biggest gains. Hiring picked up — 21% year-over-year.
But the recovery was uneven. Apparel and restaurants posted declines even as other sectors improved. And the broader economy remained under pressure. Tariff payments to Customs and Border Protection were still hitting some firms hard, though an estimated 42.6% of those payments had been returned by July — a partial refund that gave some businesses breathing room.
By August, the picture was more complex. Bank of America broadened its tracking to include firms up to $50 million in revenue, and found that small business profitability growth since May has actually exceeded that of mid-sized firms. That’s a reversal of the typical pattern — Main Street outperforming the middle market.
But capital spending remained muted. The percentage of owners planning capital expenditures over the next six months fell to its lowest level since November 2009. That was the tail end of the Great Recession. Small business owners are preserving cash, not borrowing for expansion.
The Regional Divide
The recovery isn’t happening everywhere. San Antonio and Dallas led major cities in small business payroll growth as of April. The bottom five performers — San Francisco, San Jose, Los Angeles, Phoenix, and Las Vegas — were all in the West .
Migration patterns are reshaping where small business thrives. Lower-cost states are gaining; high-cost metros are losing. It’s a geographic version of the same squeeze: businesses go where the math works.
What This Means for America
Small businesses account for more than half of all jobs in some states. They created roughly half of all net new jobs between Q3 2020 and Q3 2025 . When Main Street catches a cold, the whole country feels it.
The Bank of America Institute put it plainly: “Main Street feels more squeezed than Wall Street”. Corporate earnings hit record highs while the businesses that employ half the country spent most of 2026 watching margins evaporate.
The June and July rebound is real. But it’s fragile. Costs remain elevated. Capital spending is frozen. And the smallest firms — the ones with the least cushion — are still carrying the heaviest load.
Who Benefits: Large corporations with pricing power and access to capital markets; investors riding the S&P 500 surge.
Who Is Harmed: Small business owners absorbing cost increases they can’t pass on; workers at firms that pull back on hiring; communities where small businesses anchor local employment.
Closing Question: As corporate profits soar and Main Street struggles to recover, what should be done to level the playing field for small business owners?
Sources
[Bank of America Institute, Small Business Checkpoint: One shock after another](https://institute.bankofamerica.com/economic-insights/small-business-checkpoint-april-2026.html) (April 2026)
[Bank of America Institute, Small Business Checkpoint: A roadmap across the country](https://institute.bankofamerica.com/economic-insights/small-business-checkpoint-may-2026.html) (May 2026)
[Bank of America Institute, Small Business Checkpoint: Signs of improvement](https://institute.bankofamerica.com/economic-insights/small-business-checkpoint-july-2026.html) (July 2026)
[Bank of America Institute, Small Business Checkpoint: A summer rebound](https://institute.bankofamerica.com/economic-insights/small-business-checkpoint-august-2026.html) (August 2026)
[Bank of America Institute, Business Checkpoint: Bigger and better](https://institute.bankofamerica.com/economic-insights/business-checkpoint-september-2026.html) (September 2026)
[Strategic Thinktank, The Smallest Firms Are Carrying the Heaviest Load](https://strategicthinktank.com/the-smallest-firms-are-carrying-the-heaviest-load/) (July 2026)
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