Earnings Season Off to a Promising Start: What Lies Ahead?

As the fourth quarter earnings season for the S&P 500 gets underway, early results suggest a strong start, with both the percentage of companies reporting positive earnings surprises and the magnitude of those surprises above recent averages. This positive trend is expected to continue, with analysts predicting double-digit earnings growth for the index in CY 2025. However, macroeconomic uncertainty and potential headwinds could pose challenges to these optimistic projections.



The S&P 500 is reporting its highest year-over-year earnings growth rate for Q4 2024 in three years, with a blended earnings growth rate of 12.5% today. This is expected to mark the sixth consecutive quarter of year-over-year earnings growth for the index. Analysts expect earnings growth rates of 11.6% and 11.6% for Q1 2025 and Q2 2025, respectively, and a growth rate of 14.8% for CY 2025. The percentage of S&P 500 companies reporting actual EPS above estimates is 79%, which is above the 5-year average of 77% and the 10-year average of 75%. In aggregate, companies are reporting earnings that are 9.1% above estimates, which is above the 5-year average of 8.5% and the 10-year average of 6.7%.



Several sectors are expected to lead earnings growth in 2025, which could impact sector-specific investment strategies. Information Technology is projected to report double-digit earnings growth of 15%, driven by increasing demand for technology services and products and the ongoing digital transformation of businesses. Health Care is also expected to report double-digit earnings growth of 12%, attributed to the aging population, increased demand for healthcare services, and advancements in medical technology. Industrials, Materials, Communication Services, and Consumer Discretionary are also expected to report strong earnings growth, with projected growth rates of 11%, 10%, 9%, and 8%, respectively.



However, there are also factors that contribute to caution in these projections. Macroeconomic uncertainty, potential headwinds, and historical trends suggest that earnings estimates may decline throughout the year. Investors should maintain a diversified portfolio to mitigate risks associated with sector-specific investments and monitor the developments in the financial and energy sectors, as well as the overall economic conditions, to validate these expectations.

In conclusion, the strong start to the earnings season may continue in the upcoming quarters, with robust earnings growth and high surprise rates. However, investors should remain vigilant and consider both the potential opportunities and challenges that lie ahead. By staying informed and maintaining a balanced perspective, investors can make more informed decisions and capitalize on the market's potential.