June 17, 2025 – The stock market’s performance is a function of two variables: earnings and valuations. A company generates profits, and investors assign a multiple to those profits, such as 15x or 20x earnings, to determine the company’s valuation. This year, earnings have been in the spotlight as policy uncertainty around tariffs and global trade clouds the outlook. With Q2 earnings season starting in mid-July, it’s a good time to see how companies performed in Q1. While businesses and economists warned about rising input costs, disrupted supply chains, and slower economic growth, actual Q1 results suggest the impact was limited. Figure 1 graphs the S&P 500’s trailing 12-month earnings growth from 2001 through May 2025, which is calculated as the index’s earnings over the last 12 months divided by earnings from the prior 12 months. It shows S&P 500 earnings grew by +10% in Q1. The Wall Street consensus 2025E EPS growth rate is 8.8% and 2026E of 13.5% vs. the long-term average EPS growth rate for the time series below of ~7%. The forward P/E on the S&P 500 is at 21.4x providing limited margin of safety.
The table in Figure 2 compares Q1 2025 earnings for each S&P 500 sector against Q1 2024 results. Year-over-year comparisons strip out the impact of seasonal effects, such as winter weather and holiday spending, and provide a clearer view of underlying trends. The first column shows Wall Street’s forecasted earnings growth as of March 31st, the second column shows reported results, and the third column shows the difference. The bottom line shows S&P 500 earnings grew +13% compared to the same quarter a year ago, exceeding expectations by nearly +6%.
Looking further up the table, the data shows every S&P 500 sector reported actual results that beat the estimate at the end of Q1. Much of the S&P 500’s earnings strength came from large technology firms, particularly those involved in artificial intelligence, which continue to benefit from strong demand. However, the positive surprises weren’t limited to the technology sector, with the industrials, health care, financials, and materials sectors also beating expectations. The strong performance across sectors highlights the resilience of corporate profits in Q1 despite policy uncertainty and concerns about slowing economic growth.
The outlook for the rest of 2025 is unclear. While tariff pauses and de-escalation have eased near-term pressure, many companies remain cautious due to unresolved policy risks tied to global trade. Earnings guidance has been more conservative, with management teams flagging rising input costs and reduced visibility into future demand. It’s also important to note that Q1 earnings results reflect activity from January through March, before widespread tariffs were announced in early April. Those increased tariffs could have a delayed impact on input costs and profit margins later this year. In summary, Q1 was a solid start, but future earnings will depend on companies’ ability to navigate a complex economic, policy and geopolitical environment.