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Key takeaways
Corporate profits ended 2024 on a strong note.
Fourth quarter earnings appear to be on track for the largest year-over-year gain since 2021.
The key question going forward is if earnings can grow sufficiently to keep up with above-average market valuations.
Bolstered by solid, consumer-driven U.S. economic growth and significant corporate technology spending, S&P 500 corporate earnings keep trending higher. In 2024’s fourth quarter with 75% of S&P 500 companies reporting, S&P 500 earnings are up 16.9% from 2023’s fourth quarter. If the growth rate holds, it will represent the largest year-over-year earnings jump since 2021’s fourth quarter.1
“Technology companies are still driving earnings growth,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “Financial companies also performed well, helped by a steepening of the yield curve and elevated interest rates.” And consumer discretionary companies made earnings gains in the fourth quarter.
“It’s important that in 2025, earnings growth stays on track,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “With today’s relatively rich valuations, you can’t afford to have earnings stumbles.”
Fourth quarter earnings reports won’t be finalized until early March. In the meantime, investors are more focused on the direction of earnings going forward. Coming off two years of strong market performance (+26% in 2023, +25% in 2024),2 S&P 500 valuations begin 2025 in an elevated state. As of 2024’s close, the S&P 500’s projected price-to-earnings (P/E) ratio, a key valuation measure, is about 20% higher than its long-term average.1 “It’s important that in 2025, earnings growth stays on track,” says Haworth. “With today’s relatively rich valuations, you can’t afford to have earnings stumbles.”
Will strong performance remain concentrated in the technology sector?
In 2023 and 2024, technology stocks dominated market performance. This reflects heavy spending on artificial intelligence (AI)-related technologies. Earnings growth continues for most mega-cap technology stocks. Haworth is watching for other sectors to make greater earnings contributions. “We’re seeing better results in services and consumer discretionary companies,” says Haworth. “It’s not clear at what point energy and materials companies will participate.” Both energy and materials sectors experienced slower earnings growth in 2024’s fourth quarter.1
While the Trump administration is urging more U.S. oil drilling and production, Haworth sees some obstacles. “If there’s a resolution to the Russia-Ukraine war, it likely results in a Russian oil supply boost. At the same time, Saudi Arabia is expected to increase production soon, returning to normal levels.” Those factors, says Haworth, raise economic issues for U.S. oil companies thinking about hiking production. “The industry needs to think through what makes the most sense from a return standpoint rather than simply adding more volume.” Haworth notes that winter’s colder weather and other factors boosted natural gas demand. That drove prices higher, providing some energy sector support.
A positive earnings outlook
The environment for corporate profits evolved in recent years. The economic slowdown tied to 2020’s emergence of the COVID-19 pandemic drove earnings lower. As the economy recovered, inflation soared, leading the Federal Reserve to push interest rates significantly higher. Slower economic growth resulted, tempering the pace of corporate earnings growth in 2022, a trend that continued until 2023’s third quarter. Notably in late 2024, the Fed reduced interest rates, but lowered expectations for 2025 rate reductions.
“When fourth quarter reporting is finalized, S&P 500 earnings are projected to come in close to $240 per share in 2024 — about a 10% improvement from 2023, based on analysts’ estimates,” says Haworth. While pointing to remaining challenges given the economy's modest growth and elevated interest rates, Haworth says the earnings outlook remains positive. Current projections anticipate S&P 500 2025 earnings growth exceeding 12%.1
Earnings and stock valuations
The P/E ratio doesn’t just measure broad market valuation but is also applied to individual stocks. It is the ratio of the current price of a stock compared to the company’s earnings. A stock trading at $30 per share with annual earnings of $2 per share would have a P/E ratio of 15.
When trying to assess which of two stocks offer the best investment opportunity based on their P/E ratios, it’s not always an “apples-to-apples” comparison. “Determining fair value has a lot to do with the underlying growth rate of the industry in which the company competes,” says Haworth. In some cases, investors may be willing to bid up prices based not on current earnings, but on expectations of future profitability. “This tends to be the case, for example, with stocks that invest in new technology that may not have an immediate payoff but offer the potential of future strong earnings if they succeed,” says Haworth. “Other stocks may have lower P/E multiples, but those companies generate steadier earnings, so the payoff on the investment needs to happen in a more compressed timeframe.”
Investors also consider P/E valuations of the broader market. According to Standard & Poor’s as of January 31, 2025, the S&P 500’s P/E ratio based on earnings in the prior 12 months was 28.77, while the P/E ratio based on projected earnings for the next 12 months is 24.57.2 Analysts may set different market valuations based on varied sets of earnings projections. “At these levels, it would be challenging to generate further market gains if we saw earnings issues arise,” notes Haworth.
The underlying economic environment
2024’s positive corporate earnings record was credited in large part to solid U.S. economic growth. The outlook remains favorable going forward, but there is more economic uncertainty given the Trump administration’s economic proposals. The implementation of broader tariffs and a possible workforce reduction through proposed immigration crackdowns create potential inflation concerns.
“We still have a reasonably strong labor market,” says Haworth, “but recent surveys show consumers anticipate higher inflation going forward.” While consumer spending is the key driver of recent economic growth, Haworth says recent data raise questions about whether consumers might pull back spending activity.
On the other hand, if 2024’s economic trends continue, it may benefit a broader stock universe. “In recent times, technology-oriented stocks dominated market performance, but we think we’re seeing some broadening in the market today,” says Haworth. “In the current environment, a globally diversified portfolio puts investors in a position to capitalize on a broad array of opportunities.”
As you assess your investment options and how to best position your portfolio, it can be helpful to do so in the context of a financial plan. Talk with your wealth professional to review whether changes to your investment strategy may be warranted to better reflect your goals, risk appetite and time horizon.
Frequently asked questions
Company earnings typically reflect a firm’s net income, or the money it makes after costs are deducted. The calculation begins with revenue generated over a specific period, usually one quarter (13 weeks). Then the cost of sales, operating expenses, interest costs and taxes incurred over that same time are deducted from revenue to determine earnings.
Essentially, they are the same. Other terms used that are comparable to “earnings,” are “net income” and “the bottom line.” Investors will sometimes consider other variations on “profits.” For example, gross profits reflect the direct costs of sales incurred to generate revenue. A higher gross profit reflects significant efficiency in creating products and services that generate revenue. Operating profit accounts for indirect costs, such as marketing and administrative expenses. Net profit is a calculation of operating profit minus interest and taxes. Operating profit is the equivalent of corporate earnings.
As investors assess the financial health of a publicly traded company, earnings, which reflect the “bottom line” for a company, off a the more complete picture. Revenue reflects a company’s income. When calculating earnings, various expenses are deducted from revenue to give a sense of a company’s profitability. A firm may generate significant revenue, but if expenses are too high, its bottom line will not look as impressive. Investors put the greatest emphasis on a company’s earnings, and the pace of earnings growth over time, in determining the appropriate value of a stock.
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