U.S. stocks have delivered modest early gains so far this year but have navigated a series of headline risks tied to the AI investment thesis, renewed inflation risks, tariff uncertainty, and a looming face-off over the debt ceiling.
The S&P 500 is up about 3.4% for the year, with the Nasdaq trailing by about a percentage point thanks in part to the lagging performance of megacap tech stocks linked in part to concerns over their crippling capital spending plans.
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However, while U.S. stocks have fallen behind their European peers over the first six weeks of the year, their performance has been solid, given the myriad risks investors have had to endure, including the ongoing question of President Donald Trump’s tariff policies and their impact on the broader economy.
What’s kept stock buoyant in the face of that concern and a sell-off in megacap and AI stocks following the emergence of China-based DeepSeek’s cut-priced Chatbot? Much better-than-expected fourth-quarter earnings bode well for corporate profit growth over the coming year.
“The bulls and bears both have good arguments for markets right now,” said LPL Financial’s chief equity strategist Jeffrey Buchbinder.
Earnings have kept the S&P 500 afloat this year and are likely to remain the key driver of performance throughout 2025.
Michael M. Santiago/Getty Images
Earnings key to bull market extension
“On one side, there’s a good chance that economic growth, strong earnings, and disinflation will power stocks higher this year,” he noted. “However, the inflation battle is not over; stocks are pricing in a lot of good news, and the policy landscape is tenuous.”
“If this bull market has another leg higher in it, earnings will likely be the main driver,” he said.
With around 80% of the S&P 500 reporting December quarter earnings, collective profits are set to rise by nearly 15% from the same period in 2023 to just under $545 billion.
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That’s a $20 billion improvement from the market’s preseason forecast and includes a ‘beat’ rate, in terms of headline earnings, of around 76.3% of companies reporting.
In fact, the S&P 500 is now up more than 2.2% since JPMorgan Chase (JPM) unofficially kicked off the fourth quarter reporting season on January 15.
Stock Market needs consistent profit growth
“Now, I know that the media loves talking about earnings beats and misses, and they are important, but for long-term investors, a better gauge of your future success is earnings growth,” said Mark Malek, chief investment officer at Siebert.
“Technically, your stock can’t go up unless multiples expand, or earnings grow; the former is safer than the latter, though multiple expansion is OK, if supported by a strong thesis,” he added. “With growth, faster is better, but consistent EPS growth outclasses growth spikes.”
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To that end, LSEG data suggest first-quarter earnings growth of around 9.1%, with a collective profit tally of $514.2 billion, and double-digit advances for each of the next four quarters after that.
The figures suggest a 2025 growth rate of 11.8%, just modestly higher than the 11.4% advance likely to come from 2024 profits once the fourth quarter season is put to bed.
Richard Saperstein, chief investment officer at New York-based Treasury Partners, however, argues that focusing on earnings growth has its own risks.
Earnings are setting the bar high for stocks
“When stocks rely more on earnings growth without the help of multiple expansion, the bar is higher and companies will face pressure from investors to deliver,” he said.
“We expect solid earnings growth this year, but some expectations are elevated and there will be companies that deliver growth, but fall short of expectations, which increases the risk of volatility,” he added.
Saperstein notes, though, that he’s bullish on stocks despite the fact that valuations remain elevated, citing ‘the potential for continued economic growth, moderating inflation and an accommodative Fed.”
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Jean Bolvin, who heads BlackRock’s Investment Institute, also remains overweight U.S. equities based on what he calls a solid macro outlook and the structural shift of the “AI mega force”, but notes that new environment expands the range of likely outcomes.
“U.S. equities have proved resilient this year, though escalating trade tensions could keep the pressure on in coming months,” he said. “We think they can keep doing so, even with rolling tariff headlines – provided growth holds up and inflation stays in check.”
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