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High expectations for U.S. corporate earnings mean the flurry of earnings reports expected in the next two weeks will play an especially important role in determining the direction for Wall Street stocks, investors say, after a shaky start to 2025.
The S&P 500 had its best week since November’s US election last week, helped by strong numbers from the biggest banks, pushing the index back into the black for January.
But investors say a strong showing from many household names — worth a combined $25 trillion — is needed before the end of January if the market is to surpass the record it hit last month.
Analysts are forecasting the best quarterly results in three years, with net earnings of S&P 500 companies expected to have risen 11.4 percent year over year, according to FactSet.
The index rose 23 percent last year as demand for artificial intelligence-related stocks fueled gains for technology companies. That put the S&P at a price-to-earnings ratio of 21 times, according to data from LSEG.
“The market cannot rely on multiple extensions to boost returns because of how extended they are already in 2024,” said Jurrien Timmer, global head of macro at Fidelity Investments.
“This puts more of the onus on earnings to be the main contributor to the market’s return,” he added, also pointing to concerns about higher interest rates.
On average, a negative January for stocks leads to an average return of 2.5 percent for the rest of the year, according to strategists at Barclays. However, an opening month with gains of at least 1.5 percent tends to result in annualized returns of more than 11 percent.
After hitting a series of record highs in 2024, stocks have fallen in recent weeks, driven by concerns about the potential for higher interest rates to hurt economic growth and uncertainty about possible early action by the incoming Trump administration.
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Companies including Netflix, GE and consumer products group Procter & Gamble are among those to report this week. Tech giants including Amazon, Microsoft, Facebook parent Meta and Tesla are expected a week later.
The highest growth is still expected to come from the technology sector, including the so-called Big Seven, but investors are also looking for signs of improving profitability among other sectors in the hope that this will ease the S&P 500’s reliance on a handful of shares. .
Earnings for the Big Seven — Apple, Microsoft, Alphabet, Amazon, Tesla, Meta and Nvidia — are projected to grow 21 percent this year, slowing from a 33 percent rate in 2024, according to FactSet. Earnings growth for the other 493 stocks in the index is expected to rise to 13 percent, up from 4 percent.
Market participants will also be closely watching executives’ thoughts on President-elect Donald Trump’s potential policy agenda, with market gains since his November election victory based in part on hopes of boosting business deregulation and tax reduction.
Concerns about Trump’s actions also had the potential to take the shine off even strong earnings updates if the president moves early on some of his tariff threats, which could hurt the outlook for multinationals.
Roughly 30 percent of revenue for S&P 500 companies is generated outside the U.S., with every 10 percent rise in the dollar translating into a 3 percent hit to the company’s average earnings per share.
“The difference in growth rates between the Big Seven and the rest of the market is substantial, but I’m much more interested in the guidance of companies in terms of the pro-business narrative since the election,” said Kevin Gordon, senior investment strategist at Charles Schwab.
“We may see a mismatch between foamy animal spirits and potentially disappointing numbers for the last quarter. I wouldn’t hang my hat on the idea that deregulation (under Trump) is going to be a big growth story,” he added.
Additional reporting by Ray Douglas
