Earnings in Focus

After two years of strong performance, the S&P 500 is off to a sluggish start in 2025. Although the index is down less than 1% on the year, momentum has faded since early December. At the same time, the 10-year Treasury bond yield has increased by about 0.55% over the past month amid mounting inflation and fiscal concerns. Stocks are supported by a solid labor market and ongoing advancement in artificial intelligence (AI). Still, the largest stocks are not cheap, and this top-heavy index has little room for error. With earnings reports coming up, it's important they meet expectations. For the stock picker, there may be an opportunity to separate from the crowd.

Recently, good news for the economy has been bad news for stocks. In December, U.S. payrolls grew by 256,000, much higher than the expected 155,000, and the unemployment rate fell to 4.1%. While this is positive for the economy, it likely means the Federal Reserve will hesitate to cut rates further. The expectation of lower rates has been a powerful catalyst for stocks over the past year. Meanwhile, the anticipation of tariffs and tax cuts has pushed long-term bond yields higher, presenting stocks with greater competition for capital.

Still, it is hard to get too bent out of shape about a rock-solid labor market. Consumers are the foundation of the U.S. economy and are in good shape overall. With unemployment holding steady, a recession doesn’t seem likely anytime soon. The bigger risk to markets would be a sharp slowdown in AI development. The largest stocks have seen impressive earnings growth over the past two years, but this growth will naturally slow down as development progresses. How quickly this slowdown happens will be critical to the broader market’s direction.

Beyond AI, there are plenty of other compelling narratives centered around earnings growth. Companies gaining market share in their industries through strategic or technological innovation are always interesting to watch. With the incoming administration, industries that have been heavily regulated in the past may stand out. Mergers and acquisitions (M&A) are also expected to be back on the table in the coming year. Additionally, there are potential tax cuts for companies with U.S.-based assets. The opportunities are there.

Thanks,
Preston May, CBE®
Research Analyst

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S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.