Corporate Earnings Have Been Solid. Here’s Why Analysts Fear the Rally Is Unsustainable

The first quarter of 2025 has seen U.S. corporate earnings hold up despite a volatile economic backdrop, with the S&P 500 posting $507 billion in net profits. But beneath the surface, a storm is brewing. Analysts are slashing forecasts, companies are withholding guidance, and trade policy uncertainty is casting a shadow over margins. The question isn’t whether earnings are solid—yet—but whether they can stay that way.

The Earnings Mirage: Growth Slows, Uncertainty Rises

While Q1 earnings are still positive at 7.8% growth year-over-year, this marks the slowest pace in five quarters. The real concern lies in the trajectory: compared to Q4 2024’s record $553 billion, profits dropped by $46 billion, and year-over-year growth plunged into negative territory (-9%). Analysts have cut their estimates by 4.3 percentage points heading into earnings season—the steepest downward revision since late 2023. Sectors like Materials, Industrials, and Consumer Discretionary bore the brunt, with companies such as Ford and Apple trimming outlooks.

The catalyst? Trade policy chaos. Proposed tariffs on Chinese imports, delayed but unresolved since April 2025, have left businesses in limbo. “Tariffs could force companies to absorb higher input costs or pass them to consumers—a lose-lose scenario,” warned LPL Financial’s Jeff Buchbinder. Analysts like UBS’s David Lefkowitz now project flat S&P 500 earnings for 2025, with a 20% drop possible in a recession.

The Tech Lifeline—and Its Limits

The tech sector has been the sole pillar of growth. The “Magnificent-7” giants—Nvidia, Amazon, Microsoft, Apple, and Meta—are expected to account for 45% of the S&P 500’s Q1 earnings growth. Yet even here, cracks are emerging. While these companies still outperform the broader market, their margin advantages are narrowing. Gartner Inc., an IT services firm, raised its FY25 EPS guidance but still fell short of expectations, highlighting slowing revenue growth (4.2%) in a sector once synonymous with rapid expansion.

Meanwhile, sectors like Healthcare and Technology are masking broader weakness. Excluding them, S&P 500 earnings growth plummets to a meager 0.1%. The rest of the market is struggling: net profit margins for the index are projected to drop to 11.6% in Q1 from 12.2% in Q4 2024. Materials and Industrials face the sharpest declines, as tariff-driven cost pressures bite.

The South Bow Paradox: Dividends vs. Sustainability

Take South Bow Co. (SOBO), which beat Q1 EPS estimates but missed revenue targets. Analysts have downgraded the stock, citing a precarious dividend policy. Despite its 8.33% yield—a rare high in today’s market—the payout ratio of 108.1% exceeds earnings, raising red flags about sustainability. Major investors like FMR LLC and Vanguard are betting on long-term resilience, but the stock’s price target has been cut to $25.67, reflecting near-term doubts.

The Tariff Toll and the Guidance Void

The real threat? Companies are withdrawing guidance altogether. Q1 saw 120 pre-announcements, with negative signals outweighing positive ones by 2.4-to-1. “When management teams can’t see six months ahead, investors shouldn’t either,” said Morningstar’s Dan Kemp. The forward P/E ratio for the S&P 500 has compressed to 18.5x, down from 22.3x earlier this year—a sign of skepticism about future earnings quality.

The Road Ahead: Risks and Opportunities

Analysts aren’t entirely pessimistic. A resolution on tariffs could unlock a rebound to 10-12% growth post-Q1. But the risks are clear: a recession could send earnings spiraling. Investors must weigh high-yield plays like South Bow against the danger of overleveraged balance sheets.

Conclusion: A Fragile Foundation

The Q1 earnings report card reveals a stark truth: corporate health is tethered to policy decisions and global trade dynamics. While tech and healthcare provide fleeting growth, the broader economy is teetering. With margins under pressure and guidance evaporating, the market’s next move hinges on clarity—both in trade policy and in corporate resilience. Without it, the “solid” earnings of 2025 may prove to be a fleeting mirage.

The data is clear: the S&P 500’s earnings growth could swing from 7.8% to -20% depending on trade and macro outcomes. Investors ignoring this fragility do so at their peril.