When it comes to US corporate earnings for Q1 2025, there is one question that comes up time and time again: do US companies fear that the (US) economy will slip back into recession following President Trump’s recent statements? The answer to this question will obviously have an impact on the future outlook and performance of the S&P 500.
The facts
The trend in US corporate earnings for Q1 2025 may be more significant than in previous quarters, for several reasons.
Firstly, because the main US stock market indices had a poor first quarter, which could indicate a ‘tapering off’ of the bullish momentum we have been enjoying for over a year.
Secondly, it’s easy to imagine that the expected growth in artificial intelligence-related businesses will – at some point – slow down.
It is also conceivable that the recent rise in inflation could have a negative impact on the margins of many companies.
Last but not least, Trump’s tariffs are already having an impact on consumer and business morale.
Forecasts revised downwards
As the second quarter approaches, analyst optimism about S&P 500 stocks is back in force, with 55.7% of analysts recommending a buy rating – the highest since August 2022.
The top three sectors? Energy, technology and communications, each flirting with 63%-65% positive recommendations.
Conversely, defensive stocks, such as consumer staples and utilities, are experiencing the highest ‘hold’ and ‘sell’ ratings.
A highlight: Microsoft, Amazon and Nvidia, all members of the Magnificent 7, are among the most popular companies.
Since last October’s low (53.6% buying), the upward trend among analysts has been clear and persistent.
The market seems to be banking on structural winners and is wary of segments that are perceived as over-protected and lacking in dynamism.
More than ever, selectivity and diversification are key as we approach the 2nd quarter.
Melting profits
Officially, the US corporate earnings season kicks off on 11th April with results from – among others – JP Morgan and Wells Fargo, and there could be plenty of surprises in store. According to the excellent regular Factset study, we can expect a number of surprises:
- Earnings growth: For Q1 2025, the estimated YoY earnings growth rate for the S&P 500 is 7.1%. If 7.1% is the actual growth rate for the quarter, it will mark the seventh-straight quarter of YoY earnings growth reported by the index.
- Earnings revisions: On December 31, the estimated YoY earnings growth rate for the S&P 500 for Q1 2024 was 11.6%. All 11 sectors are expected to report lower earnings today – compared to December 31 – due to downward revisions to EPS estimates.
- Earnings guidance: For Q1 2025, 66 S&P 500 companies have issued negative EPS guidance, and 39 S&P 500 companies have issued positive EPS guidance.
- Valuation: The forward 12-month P/E ratio for the S&P 500 is 20.4. This P/E ratio is above the 5-year average (19.9) and above the 10-year average (18.3).
A phenomenon quite unthinkable not so long ago, US corporate earnings have been revised downwards every week since the start of 2025.
2025 expected to be a year of growth, but
For the first quarter, S&P 500 companies are expected to report year-over-year earnings growth of 7.1% and year-on-year revenue growth of 4.2%.
- Second quarter 2025: Analysts are projecting earnings growth of 9.4% and revenue growth of 4.6%.
- Third quarter 2025: Analysts are projecting earnings growth of 12.0% and revenue growth of 5.4%.
- Fourth quarter 2025: analysts are projecting earnings growth of 11.4% and revenue growth of 6%.
For 2025 as a whole, analysts expect earnings to grow by 11.4% and revenues by 5.4%.
Projections for 2026 are also solid, with expected growth in profits of 14.2% and revenues of 6.5%.
In terms of valuation, the 12-month price/earnings ratio for the S&P 500 stands at 20.4, above both the five-year (19.9) and ten-year (18.3) averages, but down slightly from 21.5 at the end of December. This decline is due to a 3.5% fall in the index since that date, despite a 1.8% rise in 12-month earnings estimates.
The forward 12-month P/E ratio was 25.3, above its five-year (24.6) and ten-year (22.2) averages.
The S&P 500 target price is 6,920, representing a potential rise of 21.9% on the current close (5,675). The most promising sectors in terms of expected upside are consumer discretionary (+33.4%) and technology (+29.0%), while the most cautious are utilities (+12.5%) and consumer staples (+12.6%).
Finally, 55.7% of recommendations on S&P 500 stocks are ‘buy’, 38.7% ‘hold’ and 5.6% ‘sell’. The energy (65%), information technology (63%) and communication services (63%) sectors have the have the highest percentages of buy ratings.
At sector level
Here are the expectations at sector level:
- Information technology: The sector is expected to rise sharply, with earnings growth of 14.7%, the second highest of the eleven sectors. Five of the six sub-industries are expected to post growth: Semiconductors & Equipment (+34%), Electronic Components & Instruments (+13%), Software (+10%), Communication Services (+6%), and Computer Hardware & Peripherals (+4%). Only IT services ( ) recorded a decline (-10%). Semiconductors remain the main driver of sector performance.
- Healthcare: The healthcare sector is expected to record the strongest growth in earnings, with +35.5%. Four of the five sub-sectors are up: Pharmaceuticals (+116%), Biotechnology (+67%), Healthcare Providers (+7%), and Medical Equipment and Supplies (+3%). The only sector to decline was Life Sciences and Services (-7%). This performance was strongly influenced by Bristol Myers Squibb and Gilead Sciences; but for these two companies, sector growth would have fallen to +4.5%.
- Energy: The energy sector is the hardest hit, with an estimated fall in profits of -12.3%. Three out of five sub-industries are down: Refining & Marketing (-80%), Integrated Oil & Gas (-13%), and Oil & Gas Services (-8%). By contrast, Storage and Transport (+14%) and Exploration and Production (+5%) remain in positive territory. The fall in oil prices – average of $71.69, or -7% compared with 2024 – continues to weigh.
- Consumer discretionary: After being buoyed by Amazon, the sector is now reporting virtually zero earnings growth, at +0.1%, compared with +11.2% previously forecast. This is the second biggest downward revision after materials. Ford and Tesla are the main culprits behind this deterioration. At the same time, the sector has suffered a 14.2% correction on the stock market since the beginning of January.
- Materials: The sector posted an estimated fall in profits of -10.6%, the second biggest decline after energy. Three of the four sub-industries fell: Metals & Mining (-30%), Chemicals (-12%) and Building Materials (-3%). Only Containers and Packaging are up (+44%). 96% of companies in the sector have seen their EPS estimates fall since the end of December.
- Industry: The industrial sector is growing only slightly, with an expected rise of +1.9%, compared with +9.0% previously forecast. 85% of companies in the sector have had their EPS forecasts revised downwards, with notable declines at Boeing, Southwest Airlines and GE Vernova. Despite this pressure, the sector’s share prices have risen by 1.1% since December.
- Consumer staples: The sector is suffering from an expected fall in profits of -7.2%, compared with -0.4% anticipated at the end of December. Walmart was the main contributor to this revision. Most companies in the sector have revised their estimates downwards, with sharp falls at Estee Lauder, ADM and Hershey.
What are the questions for Q1 2025?
There will of course be several themes to watch out for when US companies publish their results, including:
- Are Trump’s tariffs already having an impact on US business forecasts?
- Is the idea of a potential pause in Fed rate cuts in 2025 gaining ground among companies?
- Is the euphoria surrounding artificial intelligence waning?
- Are companies starting to feel inflation picking up again?
Conclusion
The US corporate earnings season will once again be extremely important. Remember that, whatever people say, index returns are mainly linked to corporate earnings over the last four years. Any failure to meet consensus expectations is likely to be heavily penalised, and could potentially wallop Trump.
By John Plassard, senior investment specialist at Mirabaud Group
