How much post-election optimism does corporate America have? We are about to find out. Here’s the good news on earnings: Earnings tailwinds for 2025 Strong earnings growth (14.0%) Profit margins near record highs Broader earnings contributions from stocks outside of the Magnificent Seven Here’s the bad news: Earnings headwinds for 2025 High valuations “Higher for longer” interest rate environment Fiscal/monetary uncertainty 2025: Broader earnings breadth is the theme For a second year, it’s double-digit earnings growth as far as the eye can see. S & P 500 earnings growth 2025: up 14.0% 2024: up 10.1% Source: LSEG What’s surprising is that double-digit earnings growth is expected in every quarter: S & P 500 earnings growth: 2025 (est.) Q1 2025: up 12.2% Q2: up 12.0% Q3: up 13.5% Q4: up 17.5% Source: LSEG It’s not just technology: There are healthy growth expectations for undervalued sectors like health care. This speaks directly to the theme of “broader earnings breadth.” Sector growth leaders for 2025 (est.) Health Care up 20.4% Technology up 20.3% Industrials up 19.1% Materials up 17.2% Communication Services up 14.7% Consumer Discretionary up 10.7% Source: LSEG The major issues for the 2025 earnings season The post-election vibe: Will tariffs and taxes replace election uncertainty? You heard it all last year — election uncertainty was restraining business decisions. Now that the election is over, will corporate America say it has visibility, or will this just be replaced by new uncertainty? “We are curious whether policy uncertainty on taxes and tariffs has been a new restraint on activity, or whether the passage of the election unfroze things,” Lori Calvasina, global head of equity strategy at RBC Capital Markets, said in a recent note to clients. Tariffs: Will they not be as big a shock the second time around? Tariffs are a clear downside risk. David Kostin, chief U.S. equity strategist at Goldman Sachs, estimates that each five percentage point increase in the effective U.S. tariff rate would reduce S & P 500 earnings by about 1% to 2%. However, corporate America may be better at managing tariffs than last time. Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Securities said in a recent note: “Companies so far cited they’re better positioned to mitigate the impact this time vs. 2018 for two reasons: 1) China exposure has been reduced by over 1/3 and 2) tariffs never went away (current effective tariff on China: 20%).” Tax reform: If tariffs are a downside risk, tax reform represents an upside risk. Goldman’s Kostin notes each one percentage point reduction in the statutory domestic tax rate would boost S & P 500 earnings per share by slightly less than 1%. Interest rates: Tax cuts may be a tall order, if the bond vigilantes have their way. “A spike in bond yields would increase net interest payments further, and combined with tariff increases, deepen the risk of a bout of stagflation and debt trap,” Tajinder Dhillon, senior research analyst for LSEG, said in a recent note to clients. “This suggests a more measured approach to a fiscal stimulus may result, since a positive reception from the U.S. Treasury market has become a key requirement for a successful fiscal policy.” Consumer confidence: Consumer confidence picked up since the election, but did this follow through with significant spending? Initially, yes. “The election was a clearing event,” Bank of America’s Subramanian said in a recent note. “Retail earnings indicate there was a lull in consumer spending pre-election, which was followed by a surge post-election.” Still, Mike Wilson, Morgan Stanley’s chief U.S. equity strategist, wonders if this will have any staying power. “Does improving consumer confidence following the election affect consumer spending decisions?,” he asked in a recent note to clients. “Similarly, do we see any firming in the low/middle income consumer and continued strength in high income consumers?” Impact of the dollar. The dollar is up nearly 10% since the end of September. About 40% of S & P revenues comes from outside the United States, so a stronger dollar could hurt earnings. “Our analysis shows that we should see an uptick in mentions of currency impact this earnings season,” Morgan Stanley’s Wilson said, though he also noted that foreign sales exposure varies widely. Will earnings finally ‘broaden out’ beyond Magnificent Seven? It’s one of the big projected trends for 2025: Earnings growth for the Mag 7 is expected to remain strong but decelerate from 2024, while the rest of the S & P 500 is expected to ramp up. Mag 7 earnings growth: decelerating 2025: up 18.6% 2024: up 33.4% Rest of S & P 500 (493 stocks): ramping up 2025: up 13.0% 2024: up 5.2% Source: LSEG Here’s another way to look at this “broadening out” story, courtesy of LSEG: The top 10 companies’ contribution to S & P 500 earnings this year is expected to be half of what it was in 2024. Top 10 contributors to S & P 500: % contributed to earnings growth 2025: 42% 2024: 80% Source: LSEG BofA’s Subramanian said, “Broadening EPS growth should lead to the market broadening out, in our view.” In particular, she sees a cyclical rebound in manufacturing, noting that almost half of the revenue generated by companies in the S & P 500 is from manufactured goods, and about half comes from services. The U.S. economy, on the other hand, gets only 17% of its revenues from goods, 72% from services, and 11% from the public sector. “If manufacturing/goods consumption recovers from recessionary levels, it will be a much bigger tailwind for earnings than GDP,” Subramanian said. However, this may be more of a hope than an inevitability. Kostin at Goldman Sachs cites the uncertainty of tariffs. “Higher tariff rates will lead to a near-term increase in U.S. imports, and elevated trade uncertainty will weigh on investment-sensitive manufacturing activity and corporate capex in early 2025,” he wrote in a note to clients. Bottom line: High expectations Double-digit earnings growth in two consecutive years is not easy to do. The last time it was done was in 2017-2018, according to LSEG. This “broadening out” story may be the key to keeping the market afloat in 2025. In 2024, only 357 companies in the S & P 500 had year-over-year earnings growth, according to LSEG. In 2025, 455 are expected to have positive earnings growth. That means 91% of the S & P 500 is expected to see earnings growth this year. That is a tall order.
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