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Looking ahead after 4Q 2024 earnings season
S&P 500 companies demonstrated healthy corporate fundamentals during 4Q 2024. Aggregate EPS grew 12% year/year, beating the consensus expectation of 8% growth at the beginning of reporting season. The median stock grew earnings by a more modest 7%.
We forecast 2025 S&P 500 EPS will grow 11% year/year to $268. Our EPS estimate implies roughly -1% revisions to the top-down and bottom-up consensus forecasts. Earnings revisions appear to have inflected lower over recent weeks and earnings revision sentiment has fallen into negative territory.
Tariffs are a key downside risk to our 2025 EPS forecast. Our economists expect tariff policies will raise the effective tariff rate by 5 pp. We estimate that every 5 pp increase in the US tariff rate would reduce our 2025 S&P 500 EPS estimate by roughly 1-2% and lower our estimated EPS growth rate by approximately 1 pp (to 10%). Heightened policy uncertainty represents downside risk to valuation because it raises the equity risk premium and implies downward pressure on fair value.
Reporting season results incrementally affirmed our thematic views for 2025:
– The superior earnings growth and returns of the Magnificent 7 relative to the S&P 493 will narrow. The excess earnings growth of the Magnificent 7 relative to the S&P 493 declined to 19 pp in 4Q, the narrowest gap since 1Q 2023. Bottom-up consensus estimates imply the earnings growth premium will continue to decline to 6 pp in 2025 and 4 pp in 2026.
– Outsized investments in capex and R&D have supported the exceptional performance of US stocks during the past decade. In 2025, the Magnificent 7 companies will boost their capex by 31% year/year to $331 billion. In October, just four months ago, these companies were expected to spend $263 billion on capex (+13%).
– The AI evolution will transition from Phase 2 (infrastructure) to Phase 3 (enabled-revenues). Since the start of 4Q, consensus 2025 EPS revisions to the median Phase 3 stock have been positive compared with negative EPS revisions to the median Phase 2 stock.
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Conversations we are having with clients: Implications of 4Q earnings season
Macro uncertainty dominated this week. President Trump on Saturday announced an incremental 25% tariff on Mexico and Canada imports and an incremental 10% tariff on China imports. The Mexico and Canada tariffs were then delayed until March 4th. This morning’s January jobs report showed a mixed labor market. Nonfarm payrolls increased by 143k (below the consensus expectation of 175k), but the unemployment rate declined to 4.0% (vs. expectation of a stable 4.1%). Average hourly earnings rose by 4.1% on a year/year basis vs. expectation of 3.8%.
Against an uncertain macro backdrop, micro data revealed another strong earnings season. With 61% of S&P 500 companies accounting for 72% of market cap having reported, S&P 500 aggregate 4Q profits grew by 12% year/year compared with consensus estimates of 8% growth at the start of earnings season. The median S&P 500 company grew EPS by a healthy 7% compared with a 6% expectation at the start of reporting season.
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