We are in the final stages of Q1 2025 earnings in the US. This would normally be an important time for equity markets, but this year it has been overshadowed by the aggressive trade policy being pursued by Donald Trump and his colleagues in the White House.
You could say that tariffs have trumped earnings.
That’s because trade tariffs and their impact could last well beyond one quarter. They could be with us in one form or another until 2028.
That is not to say that US trade policy doesn't have near-term effects, it has plenty, and many of these will feed into the earnings and prospects of S&P 500 companies and beyond.
The chart below is drawn from JP Morgan Asset Management’s Guide to the Markets, and it highlights the sources and drivers of earnings and profits at large US corporations.
Margin growth was the expected source of increased profitability and growth for the S&P 500 in 2026 and 2027 that growth was called into question by President Trump’s use of tariffs, especially the punitive ones imposed on China, and other Asian countries like Vietnam. Which manufacturer or assemble, many of the goods sold by US companies.
Source:JP Morgan Asset Management
High tariffs would likely increase costs, reduce margins and eat into corporate profits.
Alternatively, if companies chose to pass on the cost of tariffs to their customers and consumers, that could signal the return of inflation to the US economy. That prospect helps to explain why the Federal Reserve chose to take no action on US interest rates at its most recent FOMC meeting.
However, Wall Street analysts have been increasingly cautious about earnings in 2025 and beyond, well before tariffs reared their head. Estimates for S&P 500 EPS or earnings per share, during 2025 have been falling since July last year.
Falling estimates
Source: Larry Adam/ LinkedIn
A key driver of price change
Growth in earnings provides investors with both an incentive and the confidence to keep and add to the money they have in the equity market if earnings expectations are rising, more money is likely to come into the market, and prices will rise as demand for stocks outstrips the available supply.
This is most noticeable at an index level, and it's one of the main reasons why we talk about bull markets, which are associated with high levels of confidence among investors and other market participants.
In bull markets, companies that surprise on the upside when they report are often rewarded by a sharp jump in their stock price, and markets may even overlook the odd modest miss if the company in question is confident about the coming quarters and its overall prospects.
However, despite, a recent ralliy in US equity indices these are not bull markets in fact they are anything but.
Traders remain skittish and are concerned about limited visibility and a shifting landscape around US trade policy. With claim and counterclaim often being swapped by politicians over social media rather than through traditional diplomatic channels.
Market reaction to earnings
The table below from Bank of America quantifies the market's reaction to S&P 500 earnings up until the end of April.
We can see how stock prices performed in a variety of situations and time scales across all 11 S&P 500 sectors.
What stands out straight away is that even those companies that beat on earnings per share and revenues were not rewarded this time out. It's almost as if the market shrugged at good news.,
Source: BofA Research
At the same time, however, EPS and revenue misses weren’t punished, with one notable exception, and that was in Healthcare, where the share prices of stocks that missed expectations,on both counts, were hammered by more than -22.0% on day one and by -28.50% 5-days after reporting.
An outlier
That is an outlier and one that’s hard to explain or justify, especially when you consider that according to Factset, the Healthcare sector is on course to deliver an earnings growth rate of +4.80% for Q1 2025, a figure thats ahead of the Wall Street forecast of 4.40%.
FactSet also notes that:
“ The Health Care sector has also been the largest contributor to the increase in the revenue growth rate for the (S&P 500) index since March 31.”
And that:
“The Health Care sector is reporting the highest (year-over-year) earnings growth rate of all eleven sectors at 42.7%. At the industry level, 4 of the 5 industries in the sector are reporting year-over-year earnings growth”
The research house goes on to break down where that earnings growth has come from by subsector, or industry within Healthcare.
“ Pharmaceuticals (124%), Biotechnology (72%), Health Care Providers & Services (16%), and Health Care Equipment & Supplies (7%). On the other hand, the Life Sciences, Tools, & Services (-2%) industry is the only industry reporting a year-over-year decline in earnings.”
However, as we can see that bumper performance on earnings growth isn't being reflected in the sector performance; indeed, Healthcare has been the worst-performing sector in the S&P 500 over the last month.
S&P 500 1-Month Sector Performance
Source: Barchart.com
In the second part of this article, we will look at what's happening here and whether this mismatch between earnings and price action creates an opportunity.
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