The $40 Trillion Debt Problem, But Earnings Are Soaring
- Will Allen
- Aug 20
- 17 min read
Updated: Aug 20
The U.S. is about to cross $40 trillion in debt. In this video, we go back to 1980 to show how we got here, who is responsible, and what it now costs us every year just to pay the interest. We have charts on this you will not see anywhere else, including one that we think points to the real source of the problem.
Then we turn to the surge in company profits that has been driving the stock market for much of this year. The large cap story has been well covered, but the more interesting growth is happening below the surface in mid and small cap companies.
Next up, we look at the 10-year Treasury, what the market now expects the Fed to do next, oil back at $85, a frozen housing market, the cost of regulation in a new home, and where data centers are being built.
Video Recap
Prefer to read instead of watch? Here's the full breakdown
The path to $40 trillion took 46 years, and the last $10 trillion took six of them
Federal debt crossed $40 trillion in mid-August. In 1980 it was about $1 trillion. The line rose slowly for roughly 25 years, inflected higher after the 2008 financial crisis, crossed $10 trillion and then $20 trillion, and went vertical during COVID. What never happened after the economy reopened was a return toward the old trend. Spending stayed where the emergency put it.
This has been bipartisan. Since the early 2000s we have had two Republican and two Democratic presidents, and the line went straight up under all four.
The size by itself is not the problem. Japan and China both carry more debt relative to their economies than we do and have kept growing. The damage shows up somewhere else.
The interest bill is where the debt stops being an abstraction
Federal interest payments now run $1.247 trillion a year. For most of the 1990s and 2000s that number sat between $300 billion and $400 billion. Two things changed at once starting in 2021: the balance grew and rates rose. The interest line went nearly straight up.
Measured against the economy, interest costs are 3.15% of GDP. The old record was 3.16% in 1992, after which the number fell for a decade and stayed low for twenty years. We are back at the all-time high, and nothing in the current setup points lower over the next year.
One month of the federal ledger tells the whole story
July 2026 brought in $334 billion and spent $766 billion. That is a $432 billion deficit in a single month.
On the revenue side, individual income taxes contributed $173 billion and payroll taxes $139 billion. Corporate income taxes came in at $14 billion, a useful reminder that the corporate rate moves the federal bottom line far less than the debate around it suggests. Customs duties were negative $9 billion on tariff refunds.
Net interest was $104 billion, the third largest expense of the month behind Medicare at $174 billion and Social Security at $141 billion, and ahead of national defense at $91 billion.
The gap is a spending line, not a revenue line
Federal revenue is 18.43% of GDP against a long-run average of 17.65% going back to the 1940s. We are collecting more than the historical norm, not less.
Spending is 23.91% of GDP against a 20.72% average. COVID pushed spending to a level no peacetime budget had ever seen, and it never came back down to where it started. The roughly 5.5 point gap between the two lines is the deficit, and it closes from the spending side or it does not close. We see no sign of that yet.
The 10-year Treasury at 4.72% is the number we are watching most closely
We flagged the 10-year in our 2026 outlook because it sets business borrowing costs and drives the 30-year fixed mortgage. Through late 2025 and early 2026 it kept testing 4% and failing to break lower. Over the last three to four months it has climbed to 4.72%. It touched 5% for about a day in late October 2023, when mortgages were above 8%, and peaked at 4.78% in early 2025. You have to go back more than 20 years to find a sustained stretch above where we sit now, and we would not want to see it move much higher.
The market has flipped on the Fed to match. Six to nine months ago the expectation under new chair Kevin Warsh was a series of cuts. The implied fed funds curve now runs from the current 3.63% up through the end of the year and into next spring, pricing one hike by year end and potentially a second after that. Oil is the reason. WTI was in the high $60s six weeks ago and looked headed lower, then reversed to $85 as it became clear the Iran conflict is not ending.
The earnings story has moved down the market cap scale
Large cap profit growth has been the market's engine all year. First quarter S&P 500 earnings were expected at 13% and came in at 28.5%. The second quarter was expected at 22% and came in at 32% after stripping out the one-time gains Amazon and Alphabet booked on SpaceX and Anthropic. Those are numbers you normally only see coming out of a deep recession.
The more interesting development is underneath. Consensus has 2026 earnings growth at 32% for the S&P 500, 18% for the equal-weight S&P 500, and 43% for the Nasdaq. But the S&P Midcap 400 grew 1% in 2025 and is expected at 22% this year, and the Russell 2000 went from 5% to 37%, with 45% projected for next year. That is the strongest growth in the group, and it is why we have grown more constructive on small caps in client portfolios.
When earnings growth is this broad across every size company, it is hard for anything to hold the market down for long.
Rapid fire: seven years of prices, a frozen housing market, and where the data centers are going
Prices are up far more than the inflation rate suggests. Over seven years a pound of coffee is up 123%, ground beef 81%, a dozen eggs 76%, gas utilities 62%, home prices 60%, auto insurance 50%, and groceries 33%. Very little of this comes back down. A falling inflation rate only means prices are climbing more slowly from a much higher base.
Housing is frozen. Redfin counts 1,462,921 sellers against 966,752 buyers, the widest gap in data going back to 2013 and a record low for buyers. The 30-year mortgage sits at 6.75%. Home Depot said the same thing on its earnings call this week.
Regulation adds $132,000 to a new home. The NAHB puts the federal, state, and local regulatory cost of a new single-family home at $131,734, up from $94,000 five years ago and $65,000 in 2011.
Texas dominates planned data center capacity. Texas has close to 100 gigawatts planned with nothing close behind it, then Virginia near 37, followed by Utah, Pennsylvania, Ohio, and Georgia. More states are slowing these projects down to ask questions, though most will get built.
Key takeaways
Federal debt crossed $40 trillion in mid-August, up from roughly $1 trillion in 1980 and more than double its 2017 level
Interest on the debt now costs $1.247 trillion a year, or 3.15% of GDP, matching the 1992 all-time high of 3.16%
July alone ran a $432 billion deficit, with net interest at $104 billion ranking third behind Medicare and Social Security
Revenue is 18.43% of GDP against a 17.65% average while spending is 23.91% against a 20.72% average, which makes this a spending gap
The 10-year Treasury is at 4.72% and the market now prices one Fed hike by year end and possibly a second by spring
Russell 2000 earnings growth went from 5% in 2025 to 37% this year with 45% projected for next year, and the S&P Midcap 400 went from 1% to 22%
Redfin counts 1.46 million sellers against 966,752 buyers, the widest gap on record, with the 30-year mortgage at 6.75%
Have questions about how this affects your portfolio?
A headline number like $40 trillion is easy to react to and hard to act on, and the useful work is separating what changes a plan from what only changes the news cycle. That is the kind of analysis we bring to every Sentara Capital client relationship, and if you'd like to talk through what these numbers mean for your specific situation, we'd welcome the conversation.
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FAQ: The $40 Trillion National Debt and What It Costs
When did the U.S. national debt reach $40 trillion?
Treasury data put total federal debt outstanding at $40.05 trillion on August 18, 2026. That is more than double the 2017 level and up from roughly $1 trillion in 1980. The last $10 trillion was added in about six years.
How much does the U.S. pay in interest on the national debt?
Federal interest payments run $1.247 trillion a year, up from the $300 billion to $400 billion range that held through most of the 1990s and 2000s. As a share of the economy that is 3.15% of GDP, essentially matching the 3.16% record set in 1992.
Is the deficit a spending problem or a revenue problem?
The data points to spending. Federal revenue is 18.43% of GDP against a long-run average of 17.65%, so collections are above the historical norm. Spending is 23.91% of GDP against a 20.72% average and never returned to pre-COVID levels.
Will the Federal Reserve raise interest rates in 2026?
The market is pricing for it. The implied fed funds curve now points higher from the current 3.63%, reflecting one hike by year end and possibly a second in the spring. Oil back at $85 and the ongoing Iran conflict are the main drivers of that shift.
Why are small cap stocks expected to grow earnings faster than large caps?
Small and mid cap companies are coming off a much lower base. The Russell 2000 grew earnings 5% in 2025 and is expected at 37% in 2026 with 45% next year, and the S&P Midcap 400 went from 1% to a projected 22%. Large cap growth is still strong at 32% for the S&P 500 this year, but the following year's estimate drops to 12%.
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Click for Full Transcript
The countdown to the US hitting $40 trillion in debt is on. Today we are going to tell you how we got here and what it means going forward. We also have charts on this topic you won't see anywhere else. And then we've talked about all year how company earnings growth has been the big story for the stock market, but what's been happening with smaller companies? We have that and a lot more. Let's dive into it.
$40 trillion. That is the debt number we are about to hit, and it's going to be all over news headlines when it does. So we thought we'd give you our take on this. Let's start off by looking at the last 40 years or so. Going back to 1980, we had about a trillion dollars of debt at that time. For a long time we were slowly and steadily heading higher. And then after the financial crisis in 08-09, there was a lot of spending that took place following that deep recession. You can see we inflected higher and started going up, crossed over $10 trillion on the way to $20 trillion, and then COVID hit and things went into hyperdrive. Trillions and trillions of dollars spent, and then it didn't go back when things started to reopen and the economy got back into good graces. Spending was not cut, and you can see it has gone up.
By the way, this has been very bipartisan. If you go back to the early 2000s, we have had two Republicans, two Democrats, and the debt went straight up for all of them. So now obviously $40 trillion, this is a big number. We have seen other economies that have accumulated a lot of debt, especially if you compare it to the size of their economy. Japan and China both have larger debt amounts relative to the size of their economy than we do, and we've seen that their economies have been able to steadily head higher. But ultimately this is not a good thing.
One of the reasons it's not a good thing is because of the amount of interest we have to pay now that we're up at $40 trillion in debt. We have a chart for that too. This goes back over the same 40-year time period. You can see for a long time we were paying $300 billion, $400 billion a year in interest expense. And then in 2021 and 2022, when interest rates started going up combined with the amount of debt going up, we went from that level up to $1.22 trillion that we are spending now. That is a huge number that we are having to spend every year.
In fact, we thought we would show you a chart that takes a look at just the month of July. We're going to come back to this in a minute, but if you look at the month of July over there on the right, net interest, $104 billion. That was the third biggest expense the government had, behind Medicare and Social Security, even more than national defense, health, income security, veterans benefits, and so on. So listen, this is a number that's become a bigger and bigger part of the budget, and there's no end in sight if you take a look at this right now.
The next one we're going to talk about is taking a look at the interest as a percentage of our economy, GDP. Because yes, the amount we're paying on interest has gone up, but so has the economy in a significant way. Even if you take a look at this, and this goes back to 1970, you can see back in the early 90s this peaked at 3.16%, then went down for a long, long time and stayed at a very low level, and then has spiked in a big way. So we are literally right at the all-time high right now on this number. You can bet, if I was a betting man, I'd say over the next year this is going to continue to go up. There's nothing that indicates this is going lower. So we're going to be at a new all-time high both in terms of the number, $1.22 trillion and higher, and also the percentage of the economy that we're spending.
Now I want to go back just one last time to the chart looking at July, just to illustrate the problem that we have right now. Over on the left-hand side, that is the amount of receipts that we took in. Income taxes, $173 billion. Social insurance and retirement, that's part of payroll, $139 billion. Corporate taxes, only $14 billion. Corporate taxes are a tiny little part of the overall taxes the government brings in, and that's why the percentage change there doesn't have a big impact on the bottom line of what we actually bring in. Then on the right side, we just went over all the expenditures. So at the end of the day here, we're bringing in $334 billion, outgoing $766 billion. That is a deficit of over $400 billion for one month. Just crazy. We really need to at least see progress in this area.
All right, the final chart that we have for today is a very critical one, because what it does is it goes back to the 1940s and it says over that time, what percentage of the economy is the government spending versus what percentage are they bringing in in revenue? You can see in orange is the percentage of revenue that the government's bringing in. Right now we're at 18.4%. The average over that time is 17.65%. So you could say here, listen, we are bringing in more revenue right now as a percentage of the economy than historically we have. We don't seem to have a revenue problem here.
On the flip side, take a look at spending in blue. 23.9%, but the average has been 20.7%. And you can see there, by the way, that crazy spike in blue, that was COVID, where we spent trillions and trillions of dollars. Now looking back it was too much, and as a result of that it took us up to nosebleed levels of spending as a percentage of the economy. But right now the issue to me seems to be spending needs to come down closer to that long-term average. And again, there's just no sign of that happening.
Okay. In our 2026 outlook, one of the items that we said we want to keep watch on was the 10-year Treasury rate. This rate has a big impact on what companies have to pay to borrow money and what mortgage rates are, specifically the 30-year fixed mortgage. And this has been heading higher now steadily ever since the Iran conflict began. You can see this, and I just want to focus really on late 25 and early 26. This kept going down to 4%, and we said we want to see it break below four and go lower if you want to see rates coming down. But every time it got to four, it would go higher. You can see over the last three, four months this has steadily been climbing and is now at 4.72%.
If you go back over this last five years, in late October of 23 we hit 5% for about a day. That's when mortgage rates were over 8%, by the way. And then in early 25 we hit 4.78%. That was the peak. So we're getting up close to the highest level. And by the way, you have to go back over 20 years to the last time we were above this for any significant amount of time. So again, this is important. We don't want to see this rate get much higher than it is now. We're tracking it, of course, on a daily basis.
Now, speaking of interest rates, I want to pull up what the market is implying as far as the fed funds rate. This is an overnight rate that the Fed controls. Kevin Warsh is the new Fed chair. If we go back six to nine months, it was expected that there were going to be a lot of rate cuts this year. Well, that has flipped. Right now you can see down there, July and August, 3.63%, that's the current fed funds rate. This is projecting over the next six to nine months that there are going to be rate hikes. One by the end of the year, and then potentially another one as you go into the spring.
Now listen, this can change on a dime for any reason, but it tells you where the market's at right now. It is concerned about inflation. We have oil very high and prices are going up, especially food. And we have the Iran conflict still going on. So this is the market saying, hey, the Fed might have to hike to get ahead of this.
And then of course, I just mentioned it, but let's put it up there. Oil at $85. If we go back just about a month, month and a half, it had dropped to $70. In fact, it got into the high 60s for a day or two and it appeared to be heading back into the lower 60s. But that has not happened, as it's become evident that this conflict is just not ending still. And so now we're back up at $85. Not good news for inflation and not good news for interest rates.
So a big story we have been talking about all year long has been the growth in company earnings, especially for the S&P 500. If you haven't seen this before, in the first quarter profit growth was supposed to be 13%, came in at 28.5%. And the second quarter was supposed to be 22%, came in at 32% if you strip out Amazon and Google, the gains they got from SpaceX and Anthropic. So these are rates of return you just don't see unless you're coming back from a deep recession, which did not happen.
But we thought today we'd take a look at not just this year, but what the market's projecting growth will be next year for the large cap, and also what's happening with smaller companies, midsize companies. And again, this has to do with the size of the business and the value of the business. The S&P 500 on the far left, most of you are familiar with that. The 500 biggest companies in the US is one way of thinking about it, though there are a few companies that aren't publicly traded yet that aren't in there. You can see we went from 12% earnings growth last year in 25, right now for the full year expectations 32% growth. This is hard to believe, how good news this is to see that, and it's really pushed the markets higher this year more than anything else. And then next year, right now projections, 12% growth. Not too bad, though next to 32% it doesn't look so great, no doubt about that.
All right, next to that, equal weight S&P 500. See, the S&P, about 30% to 40% of it are the biggest tech names like Google, Tesla, Microsoft, Nvidia. And so this equal weight takes a look at every company in the S&P 500 and weights them the exact same. So it gives you an idea of underneath the hood what's really happening. You can see this was 10% last year, jumped to an expected 18% this year. A really good number.
Next to that, the Nasdaq. I'm going to skip that. That's tech heavy, and we know tech's leading the growth. 43% numbers this year. Then the two categories I wanted to focus on here, midcap and the Russell 2000 small cap. Again, the smaller companies in the economy. Look at the midcap. In 2025, growth was 1%. There was basically no growth happening. Now this year, 22%. That is a tremendous number for those midsize companies. And then over on the right, the Russell 2000 takes the cake, going from 5% last year to 37%, and then next year 45% expected growth.
So listen, this is one of the reasons we have gotten more upbeat and positive on small cap stocks in our client portfolios, because there's growth taking place now in this group that we haven't seen in many, many years. And again, when you have this kind of earnings growth across all the different size companies, it's going to be tough for anything to keep the stock market down for long.
Now it is time for rapid fire, and this is where we go over a couple of key data points that we think you need to know about. We're going to start off talking about a topic that's important here, and we'll do this quickly. We know there are a lot of people out there who are feeling the pinch, who are feeling the pain, because prices are so much higher for so many items than they were pre-COVID. And this chart drives that home.
Take a look over the last seven years, the total increase in price. A pound of coffee, 123%. For those addicts out there, this hurts a lot, because there's nothing you can do about it, so you keep paying the price. After that, ground beef 81%, eggs 76%, gas utilities 62%, home prices 60%. A big reason that a lot of houses are unaffordable, especially for younger people, is because not only have prices gone up a lot, but mortgage rates have more than doubled. That combo is lethal for housing. And then you can see there are other categories in there, including restaurants and groceries. So listen, this is a chart that says we feel your pain here. And there's not much that can be done in the short run, because a lot of these prices just are not going to come down very much in the future.
All right, next up is taking a look at the housing market. We just got data on the number of sellers, people who have their homes on the market, versus buyers. And you can see this looks like about the largest gap in this data's history, going back to 2013, from Redfin. And here's the problem. You know how we talked about how the 10-year Treasury is up near its highest level in many, many years? Well, that means that a 30-year mortgage is at 6.75%. Housing is in a freeze. In fact, Home Depot had their earnings today, and that's exactly what they said. They said housing is in a freeze right now. Things are not going well. And any seller of a home today knows it is difficult to find a buyer.
Now, next chart, and this is also housing related, takes a look at, and this was the NAHB that put this out, the average cost of regulation in the price of a new home. We know that there's a lot of red tape if you want to build a house. And take a look at this. In 2011, it was $65,000. So if you bought a house for $200,000, $65,000 of it was the cost of these regulations. This is now up to $132,000. And look at that jump from just five years ago, when it was $94,000. Man, there are a lot of factors for why housing is so expensive today. This definitely is one of them.
All right, the last chart we have for you today is taking a look at a hot button topic, data centers. And by the way, we talked about this in our last video. It was a podcast style, me and Jonathan Brummel. We talked about Social Security. We talked about UTMA and 529 accounts for kids, and we had client Q&A. And the biggest question we've had recently is tell us about what's going on with data centers. Go watch that to see the full answer. This is rapid fire, but this shows what states, where most of these data centers are taking place and where are they planning to be built. Texas is by far up at the top there, and there's nothing close. Virginia is two, Utah three, Ohio and Pennsylvania, and then Georgia. You can see the other states there. There are a lot of states where there are no data centers being built. But the bottom line is there are more and more states saying hold up, we need to ask some questions, we need to slow this down a little bit. But a lot of these are going to be built at the end of the day.
Okay, so the key takeaways are $40 trillion. Need I say more, really, right? This is a problem, but it's not a problem for today, in that the stock market's near all-time highs and earnings growth is absolutely exploding higher for large, mid, and small companies.
Hey, if you are new to Sentara Capital, go check out our updated website. We have a couple of updated pages on investing and retirement. And if you have an advisor who doesn't do these kinds of updates and doesn't give you A+ service, reach out to us. We'd love to talk to you.
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