Company Earnings Q1 2025 Preview: What Investors Need to Know

TradingKey - Markets are in a state of flux right now. There are multiple uncertainties on the horizon, from a potential global tariffs war to rising geopolitical tensions in Ukraine as well as the Middle East. 

Finally, entrenched inflation in the US, alongside slowing economic growth, is increasing the possibility of a stagflationary scenario (i.e. anaemic growth with higher-than-normal inflation) for the global economy. That would be terrible for global stocks and broader financial markets.

Despite higher interest rates in the US over the past few years, what has been keeping the S&P 500 Index heading higher during this time has been the earnings picture. On the whole, earnings per share (EPS) growth has been solid and, of course, that has been driven by the robust numbers being posted by technology companies.

However, heading into the earnings season in April, investors are much more nervous. That’s down to the steep declines in key US stock indices over the past month or so. 

Who did well in Q4 2024?

Before investors head into the Q1 2025 earnings period, it’s worth looking back at the most recent quarter of numbers (for Q4 2024) to see which sectors outperform expectations.

According to FactSet’s Q4 2024 scorecard, there was mixed performance from companies in the S&P 500 Index in the latest earnings season. Leading the pack (in terms of S&P 500 Index sectors), with over 80% of companies reporting profits above consensus estimates, were Financials, Consumer Discretionary, and Information Technology.

It was no surprise to see both Real Estate (51%) and Utilities (48%) as the bottom two in terms of the number of companies posting profits above consensus estimates.

Financials could understandably be seen to be benefitting from a higher rate environment as well as a US economy that is continuing to hold up well (albeit with weaker jobs and consumer spending data recently). As for IT, clearly the Artificial Intelligence (AI) story is continuing to drive the sector higher in terms of earnings growth.

The reverse is true for Real Estate and Utilities, which have been underperformed in recent years – weighed down by higher interest rates. That underperformance looks set to continue until the Federal Reserve (Fed) signals more rate cuts are likely in the near term.   

What’s on the horizon for Q1 2025?

In terms of analysts’ expectations for Q1 2025, there are just over 12,300 analyst ratings on stocks in the S&P 500 Index. Of these, 55.7% are “Buy” ratings, with 38.7% as Hold, and just 5.6% as a Sell rating.

In terms of sector expectations, analysts are most optimistic on the Energy sector (65%), Information Technology (63%) and Communication Services (63%) as these have the highest percentage of “Buy” ratings.

On the whole, estimated earnings for the S&P 500 Index in Q1 2025 are currently lower than they were at the beginning of 2025. Even so, analysts do expect the index to notch up a seventh consecutive quarter of year-on-year earnings growth, coming in at +7.1% year-on-year growth, when the numbers are reported.

Source: FactSet

Analysts are already starting to mark down numbers, as on a per-share basis estimated earnings for Q1 2025 have declined by 4.0% year-to-date. That decline is significantly higher than both the 5-year average markdown of -3.3% and 10-year average markdown of -3.2%.

Of the 11 GICS sectors in the S&P 500 Index, seven of them are expected to report year-on-year earnings growth, led by Healthcare and Information Technology.

Interestingly, while estimated earnings are being marked down right now, the percentage of “Buy” ratings is still relatively high versus recent history. As is well known, analysts estimate lag markets and only catch up “after the fact”.

Looking back at early 2022, just before the Fed started raising rates aggressively, the percentage of “Buy” ratings was at 57.5%. Of course, as the stock market fell sharply in 2022, analysts caught up later by downgrading earnings fast and the percentage of “Buy” ratings plummeted to close to 53% by early 2023. 

That would have been a good sign to actually “buy the market” at that point as – looking back – the sell-off actually hit a bottom in October 2022.

Are we headed for something similar in 2025?

For investors, it’s worth noting that analyst estimates are still positive and overall “Buy” ratings actually remain relatively high. Meanwhile, the external environment and picture is actually deteriorating, particular on the sentiment front and with uncertainty lingering on both the economy and the impact of tariffs on inflation.

That’s a big reason why stocks have sold off in recent weeks. Yet, if the economic data in the months ahead continues to get worse, then the market could be in for more declines and analysts will have to downgrade their expectations.

Overall, at this point analysts are relatively sanguine about the earnings picture for S&P 500 Index companies for Q1 2025. Whether the current uncertainty and selloff is just a blip, or whether it turns into something more serious, will only be evident in the quarters ahead. 

However, investors will be closely watching what management teams say with regards to both tariffs and inflation in the upcoming earnings season.