Earnings Expectations are Falling. That’s a Good Thing
The first four months of the year were dominated by trade and economic policy uncertainty. But let’s not forget what ultimately matters most for stocks: corporate earnings.
I’ll dive into some details below, but the high-level takeaway is that U.S. corporations held up relatively well in the first quarter, while also scaling back expectations for the quarters ahead. And I see this latter point as good news for stocks.
As I write, roughly half of S&P 500 companies have reported Q1 2025 earnings, and the results show +14.0% year-over-year earnings-per-share (EPS) growth on +4.0% higher revenues. Approximately 72.3% of companies beat their EPS estimates, which is pretty much in line with historical averages. All of these figures point to a solid state for U.S. corporate profitability.1
The real story this earnings season, however, is not what happened in Q1. It’s about what corporations are seeing ahead. In short, they see decelerating earnings growth.
For Q2 2025, total S&P 500 earnings (based on companies that have reported) are expected to be up +7.0% from the same period last year on +3.8% higher revenues (see chart below). Estimates for the period have been coming down in a notable way, and we’ve also seen many companies avoid providing guidance altogether—which is rare but understandable in this moment. As more companies report in the coming weeks, I’d expect this revision trend to continue.
Investors may see this trend and register it as bad news. But it actually may end up being the opposite.
Long-time readers of my columns have seen me make this argument before, whether in the context of earnings expectations or recession fears. As consensus starts to tilt negative and expectations fall, the bar gets lowered for the economy and U.S. corporations to ‘over-deliver.’ And when that happens, stocks tend to rally
A clear example comes from 2022—Google searches for “recession” spiked as inflation rose and the Federal Reserve shifted into hawkish mode, and a broad majority of economists were calling for economic contraction. But the recession never came, and the stock market delivered exceptional returns in 2023 and 2024 even as the inflation battle was still ongoing. Today, as corporations signal an increasing amount of caution, they are essentially setting the stage for ‘better-than-expected’ outcomes down the road. Investors should see that as a positive.
Remember, even though the outlook for corporate profits is unclear, the underlying fundamentals of the U.S. economy have so far remained stable. Job growth continues at a healthy pace, with the labor market adding an average of 155,000 positions per month over the past quarter—just slightly below last year’s monthly average. Unemployment remains low, and jobless claims have yet to show signs of significant uptick, suggesting employers are cautious about letting workers go.
Some readers may point out that the “advance” estimate of Q1 GDP showed a -0.3% contraction. But the negative growth was largely the result of an import surge tied to tariff uncertainty, rather than a collapse in domestic demand. Consumer spending still grew (+1.8%), and business investment held firm. What I think we’re seeing overall is a broad shift in sentiment and expectations tilting towards the negative, with actual economic data continuing to outperform. That’s a good thing.
Bottom Line for Investors
Markets do not rise or fall based solely on current earnings. They move on expectations.
Today, we’re seeing a significant downshift in what corporations are expecting from an earnings standpoint. While that may seem like a warning sign, for long-term investors it is actually a setup for opportunity. Because while earnings growth is slowing, it is not collapsing, and the first quarter showed solid profit margins and stable revenue gains.
The state of the U.S. economy is also under-appreciated, in my view. Job creation continues, consumer demand is holding up, and business investment hasn’t materially weakened—despite ongoing policy noise and tariff volatility. This combination of solid fundamentals and falling expectations creates room for upside surprises, in my view. Historically, when sentiment gets too bearish but economic reality stays steady, markets have a tendency to rally. Investors would be wise to lean into that dynamic rather than fear it.
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