Key takeaways
Corporate profits ended 2024 on a strong note.
Fourth quarter earnings generated the largest year-over-year gain since 2021.
The key question going forward is if earnings can grow sufficiently to keep up with above-average market valuations.
With fourth quarter 2024 earnings reports complete, S&P 500 companies continue to generate solid earnings growth. Steady growth, bolstered by healthy consumer spending and significant corporate technology spending propelled earnings. Quarterly earnings are up 18.6% from 2023’s fourth quarter. It represents the largest year-over-year earnings jump since 2021’s fourth quarter.1
The bigger question moving forward is whether the economy maintains sufficient strength to sustain 2025 earnings. This includes uncertainty revolving around the impact of new Trump administration economic policies. Investors are particularly attuned to more protectionist trade strategies. This includes increased tariffs on key trading partners.
“Fourth quarter results trended above expectations,” says Terry Sandven, chief equity strategist for U.S. Bank Asset Management. “What’s missing is company guidance about 2025 earnings expectations. This is partly due to unknowns related to tariff policies.”
Coming off two years of strong market performance (+26% total return in 2023, +25% in 2024), S&P 500 valuations started 2025 at elevated levels. In 2025, stocks face a more volatile environment and in mid-March, the S&P 500 experienced a correction (a decline of 10% or more).2
“Fourth quarter results trended above expectations. What’s missing is company guidance about 2025 earnings expectations. This is partly due to unknowns related to tariff policies.”
erry Sandven, chief equity strategist, U.S. Bank Asset Management
Despite that, the S&P 500’s projected price-to-earnings (P/E) ratio, a key valuation measure, remains slightly above its historic five-year and ten-year average.1 “It’s important that in 2025, earnings growth stays on track,” says Rob Haworth, senior investment strategy director, U.S. Bank Asset Management. “With today’s relatively rich valuations, you can’t afford to have earnings stumbles.”
In 2023 and 2024, stocks benefited from consistent economic growth, with technology stocks dominating market performance. Technology company revenues benefited from heavy spending on artificial intelligence (AI)-related investment. Haworth says it’s important for other sectors to make greater earnings contributions. In 2025’s early months, investor sentiment shifted. The sectors that led the previous year’s market performance, information technology, communication services and consumer discretionary, are now dragging down market performance.2
The three sectors at the bottom of 2025’s performance results represent approximately 50% of the S&P 500’s market capitalization. Notably, the remaining eight sectors are in positive territory year-to-date despite the S&P 500’s negative return. This is a mirror image of the prior two years, when communication services, information technology and consumer discretionary stocks fueled the markets’ double-digit gains, while other sectors vastly underperformed the broader S&P 500.2
Current market projections call for 11.5% S&P 500 earnings growth in 2025 compared to the previous year.1 That number is subject to change. “When we look at the potential impact of tariffs and other issues, it’s hard to envision that 2025 earnings will meet current expectations,” says Sandven. “We expect to see some 2025 earnings revisions as first-quarter earnings reports are released.”
The full impact of tightened trade policy remains unclear as several proposed tariff increases have yet to be implemented. “The impact of tariffs on company profits is likely to be mixed,” says Haworth. “Companies more dependent on importing goods manufactured overseas may face more challenges,” Haworth says the same may be true for multinational companies that ship products overseas if other countries apply retaliatory tariffs.
By contrast, smaller companies not as dependent on foreign trade may be better positioned to weather the trade environment. “Since they aren’t selling into foreign markets and not dependent on foreign goods, smaller companies may have more pricing power,” says Haworth. That could translate into a healthier earnings picture. Haworth notes, “Smaller companies face a challenge with higher financing costs in today’s interest rate environment, which can hamper their bottom lines.”
The P/E ratio measures broad market valuation and is also applied to individual stocks. It is the ratio of a stock’s current price compared to the company’s earnings. A stock trading at $30 per share with annual earnings of $2 per share has a P/E ratio of 15.
When assessing which of two stocks offers the best investment opportunity based on their P/E ratios, it’s not always an “apples-to-apples” comparison. “Determining fair value has a lot to do with the underlying growth rate of the industry in which the company competes,” says Haworth. In some cases, investors may be willing to bid up prices based not on current earnings, but on expectations of future profitability. “This tends to be the case, for example, with stocks that invest in new technology that may not have an immediate payoff but offer the potential of future strong earnings if they succeed,” says Haworth. “Other stocks may have lower P/E multiples, but those companies generate steadier earnings, so the payoff on the investment needs to happen in a more compressed timeframe.”
Earnings are the ultimate driver of market performance. At times, other factors can influence short-term market swings. Federal Reserve interest rate policy often has an immediate impact on the markets. More recently, President Trump’s tariff proposals, and frequent changes to announced tariff plans, added to significant market volatility.
Investors often respond to the perceived potential corporate earnings impact based on specific events or policies. Despite the market’s early 2025 struggles, most underlying data remains favorable. “We still have a reasonably strong labor market,” says Haworth, “but recent surveys show consumers anticipate higher inflation going forward.” While consumer spending is the key driver of recent economic growth, Haworth says recent data raise questions about whether consumers might pull back spending activity. Consumer sentiment, as measured by a University of Michigan survey, fell considerably in 2025’s early months.3 Whether that translates into slower economic activity is not a given, but investors will closely monitor spending trends for signs of potential weakness that could dampen earnings.
While U.S. stock markets struggled in 2025’s first quarter, global stocks generated positive returns. “In the current environment, a globally diversified portfolio puts investors in a position to capitalize on a broad array of opportunities,” says Haworth.
As you assess your investment options and how to best position your portfolio, it can be helpful to do so in the context of a financial plan. Talk with your wealth professional to review whether changes to your investment strategy may be warranted to better reflect your goals, risk appetite and time horizon.
Company earnings typically reflect a firm’s net income, or the money it makes after costs are deducted. The calculation begins with revenue generated over a specific period, usually one quarter (13 weeks). Then the cost of sales, operating expenses, interest costs and taxes incurred over that same time are deducted from revenue to determine earnings.
Essentially, they are the same. Other terms used that are comparable to “earnings,” are “net income” and “the bottom line.” Investors will sometimes consider other variations on “profits.” For example, gross profits reflect the direct costs of sales incurred to generate revenue. A higher gross profit reflects significant efficiency in creating products and services that generate revenue. Operating profit accounts for indirect costs, such as marketing and administrative expenses. Net profit is a calculation of operating profit minus interest and taxes. Operating profit is the equivalent of corporate earnings.
As investors assess the financial health of a publicly traded company, earnings, which reflect the “bottom line” for a company, off a the more complete picture. Revenue reflects a company’s income. When calculating earnings, various expenses are deducted from revenue to give a sense of a company’s profitability. A firm may generate significant revenue, but if expenses are too high, its bottom line will not look as impressive. Investors put the greatest emphasis on a company’s earnings, and the pace of earnings growth over time, in determining the appropriate value of a stock.
With the market and economy in flux, how should investors position their portfolios to capitalize on potential opportunities, while guarding against risks?
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