Investors focus attention on corporate earnings

S&P 500 companies are closing out the third quarter of 2025 by delivering robust earnings growth that surpasses analyst expectations. Strong consumer spending, increased corporate technology investments, and healthy profit margins are driving positive results. By early December 2025, 97% of companies reported quarterly results, with earnings rising 12.9% compared to 2024’s third quarter, significantly better than analysts’ 8% growth expectations. ¹

“The equity market is still trending higher. That goes back to healthy fundamentals,” says Terry Sandven, chief equity strategist for U.S. Bank Asset Management Group. “Most importantly, consumer and corporate technology spending remain strong, corporate margins remain robust, and inflation doesn’t appear problematic.”

Valuation adjustments

Two strong market performance years (+26% total return in 2023, +25% in 2024) led to investors’ valuation concerns. Earlier in 2025, negative tariff sentiment triggered a nearly 20% drop in the S&P 500, but the index has rebounded more than 37% from its April 8 lows. The S&P 500 remains near all-time highs, delivering a 17.8% year-to-date total return. ²

The S&P 500’s projected price-to-earnings (P/E) ratio, an important valuation measure, remains above its five-year and ten-year averages. ² “Sustained earnings growth is crucial for supporting these valuations,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group. “With valuations rich by historical measures, companies can’t afford earnings stumbles, and so far, they’ve hit the mark.”

Broader sector leadership

Consistent economic growth has benefited equities in 2023, 2024, and 2025, with technology stocks driving the market’s rally. Significant artificial intelligence (AI)-related investment spending continues driving technology company revenues. After a slow start to the year, information technology is once again among the top S&P 500 performing sectors, generating year-to-date total returns near 25%. Market gains broadened in 2025, with communication services, industrials, and utilities stocks delivering returns between 18% and 34%. ²

Assessing corporate earnings expectations

The consensus earnings growth estimate for S&P 500 companies in 2025 compared to 2024 is 10%. The growth estimate for 2026 compared to 2025 is 13.2% for S&P 500 companies. These forecasts may change as new information emerges, but the economy and corporate profits remain solid, even in the new tariff environment. Recent tax legislation (the “One Big Beautiful Bill Act” or OBBBA) allows companies to fully expense or depreciate certain costs, lowering taxes and stimulating investment. Meanwhile, forecasters anticipate an even larger boost to consumers in 2026 as tax filing dates approach, further benefiting companies’ sales prospects.

Companies are revising forward earnings guidance higher, consistent with prior years’ trends. “Earnings guidance followed normal seasonal patterns, beginning with early-year lofty expectations, followed by companies lowering guidance in the year’s first half,” says Bill Merz, head of capital market research for U.S. Bank’s Asset Management Group. “Now we’re seeing more companies revise earnings guidance higher rather than lower, signaling rising economic confidence and fundamental business model strength.”

Earnings and stock valuations

The price-to-earnings or P/E ratio measures broad market valuation and is also can apply to individual stocks. It is the ratio of a stock’s current price compared to the company’s historical or anticipated earnings. For example, a stock trading at $30 per share with annual earnings of $2 per share has a P/E ratio of 15.

Currently, large U.S. stocks’ P/E ratios remain high, which investors at least partially justify by companies generating above average earnings growth. Assessing which stocks offer the best investment opportunity based on their P/E ratios is not always an “apples-to-apples” comparison. “Determining fair value has a lot to do with the underlying industry’s growth rate in which the company competes,” says Haworth. “Stock valuations have a relatively low statistical relationship with returns over the next one to five years, for example, but do have a modest relationship with longer-term returns, like a 10-year forward view.”

In some cases, investors may be willing to bid up prices based not on current earnings, but on expected 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 company’s investment needs to happen in a more compressed timeframe.”

The underlying economic environment

Corporate earnings drive long-term equity market performance, but factors like Federal Reserve (Fed) interest rate policy can have an outsized market impact. The Fed cut rates twice so far in 2025, with investors anticipating another rate cut at the December meeting. ³ Lower rates reduce business and consumer funding costs, boosting economic activity.

Despite 2025 market fluctuations and somewhat elevated stock valuations, most underlying economic data supports the market’s upward trend. “Consumer spending remains robust overall, growing about 4.5 to 5% year-over-year according to government and private sector sources,” says Merz. “Lower income groups face challenges, especially amid high interest rates despite recent Fed cuts, but higher income consumer spending continues driving a disproportionate share of overall consumer spending and supports corporate earnings growth.”

Year-to-date, global stock markets are outpacing U.S. stocks. ⁴ Fed rate cuts in late 2024 and cuts by other global central banks over the course of 2025,reduced global borrowing costs and lower relative valuations attracted diversified investors, while a declining dollar boosted foreign equity returns for U.S.-based investors. “In the current environment, a globally diversified portfolio allows investors to capitalize on a broad array of opportunities,” says Haworth.

As you assess your investment options and how to best position your portfolio, consider doing so within 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.