Transcript
Amada Agati:
They say April showers bring May flowers, so is the market deluge from early April already sprouting some green shoots? Hope “springs” eternal in this month’s edition of Adding Alpha as we dive into our favorite topic, corporate earnings, and check-in on Q1 results so far.
We started the year with solid S&P 500 earnings growth expectations for 2025 of 13%, after a rock-solid 9% result to finish out 2024, but then the purple haze of policy uncertainty started to quickly grip markets, leading to the worst negative revision period for earnings since the onset of the pandemic. Expectations for Q1 earnings fell 500bps to 7% in a matter of just a few weeks.
Q1 earnings season started with the bar set very very low, particularly given there appeared to be very little discernable fundamental impact from new tariff and trade-related policies announced in Q1 – these things take time to work themselves into the system. In the short run, it’s been a major hit to business and investor sentiment, confidence, and is showing up in the softer survey-related data as opposed to hard data.
As of this recording, about 65% of S&P 500 companies have reported results for Q1. On the surface it looks to be a solid quarter, exactly when we needed it, to help calm all the negative vibes – we’d give it a solid A as a letter grade – with the blended growth rate so far up a positive +12.8% year-over-year.
Positive beats are coming in strong with nearly 75% of companies beating, and even more impressive is the upside surprise of more than 900 bps – about double the L-T average. Topline growth is also coming in strong at +4.8% with 10 out of the 11 sectors contributing.
It’s not just a “Magnificent 7” story – especially after the weak results from AAPL and AMZN – we’re seeing strong results from Financials, Health Care, and even Utilities are delivering +13% EPS growth! There’s that market breadth story materializing.
Also notable, we’re seeing signs of profit margin expansion across several sectors. Still about 25bps off the all-time high back in 2021 of 14%, but in this environment those margins are proving to be pretty high quality, which should help create a bit of a buffer if we see inflation pressures start to creep back in.
Delta Airlines was the first company out of the gate to report earnings pre-market on April 9th and immediately pulled their guidance in the face of all the purple haze of policy uncertainty – we expected it to begin a cascade of many others across the market following suit. So, it’s no coincidence the "Trump Put" came later that same day. The 90-day reciprocal tariff pause on April 9th was absolutely critical in saving Q1 earnings season and likely much of Q2 too.
And while all of this sounds great, we’re mindful of what may still lie ahead. Second quarter revisions are still falling, but at least they’re not as severe as Q1.
For now, S&P 500 earnings growth is still projected to be ~9% for 2025, but there’s downside risk to it unless the purple haze of policy uncertainty lifts soon.
Because estimates for the year haven’t budged much, earnings multiples haven’t contracted all that much either. Believe it or not, the S&P 500 is only down about 2 multiple points of forward P/E from its February 19th high of 22x and currently trades at 20x. At its worst point in the correction to-date, P/E was down 4 points, but the 12.5% rebound since the April 8 lows suggests the market is betting this is simply a growth scare at these valuation levels, not ultimately a recession.
The 10 largest stocks in the S&P 500 are trading at a forward P/E of 26.7x versus 19.2x for the rest of the index – so the market correction has helped to close that gap a bit, but it remains quite wide and will continue to be a key governor in terms of the market’s ability to advance in 2025.
We need some policy wins to help clear out the purple haze – in the form of trade deals, tax legislation, budget clarity, the debt ceiling, and so on to help create some counterbalances to the headwinds that are coming from tariffs and trade. It’s not too late to turn the tide on this, but the clock is ticking. And July 9th will be pivotal in terms of an inflection point for markets.
