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High expectations for U.S. corporate profits mean the flood of earnings reports over the next two weeks will play an especially important role in determining the direction of stocks on Wall Street, investors say, after a shaky start to 2025.
The S&P 500 had its best week since last November’s US election, helped by strong numbers from major banks, pushing the index back into the black for January.
But investors say a strong showing is needed from many big names – worth a total of $25 trillion – due to report before the end of January if the market is to surpass last month’s record high.
Analysts are forecasting their best quarterly results in three years, with S&P 500 companies expected to see net income rise 11.4 percent year over year, according to FactSet.
Index jumped 23 percent last year as demand for AI-related stocks fueled tech company gains. That put the S&P at a forward price-to-earnings ratio of 21 times, according to LSEG data.
“The market cannot rely on multiple extensions to increase returns because of how much [they] already extended in 2024,” said Jurrien Timmer, global head of macroeconomics at Fidelity Investments.
“It puts a bigger burden on earnings, which are the main contributors to the market’s recovery,” he added, also pointing to jitters about higher interest rates.
On average, a negative January for stocks leads to a median return of 2.5 percent for the rest of the year, according to strategists at Barclays. However, an initial month with gains of at least 1.5 percent typically results in annualized returns of more than 11 percent.
After a string of record highs in 2024, stocks have stumbled in recent weeks, fueled by concerns that higher interest rates could hurt economic growth and uncertainty over likely early actions by the new Trump administration.
Companies including Netflix, GE and consumer products group Procter & Gamble are among those to file reports this week. Tech giants including Amazon, Microsoft, Meta parent Facebook and Tesla come a week later.
The biggest growth is still expected to come from the technology sector, including the so-called Magnificent Sevenbut investors are also looking for signs of improving profitability among other sectors in the hope that it will ease the S&P 500’s dependence on a handful of stocks.
Earnings of the Magnificent Seven — Apple, Microsoft, Alphabet, Amazon, Tesla, Meta and Nvidia — are projected to grow 21 percent this year, slowing to a 33 percent rate in 2024, according to FactSet. Earnings growth for the other 493 stocks in the index is expected to rise to 13 percent, from 4 percent.
Market participants will also be closely watching executives’ thoughts on President-elect Donald Trump’s likely policy agenda, with market gains since his election victory in November based in part on hopes that deregulation and tax cuts will boost business.
Concerns about Trump’s actions also have the potential to take the shine off even the strong earnings update if the president backs off some of his tariff threats early, which could hurt the outlook for multinationals.
About 30 percent of S&P 500 companies’ revenue is generated outside the U.S., with every 10 percent rise in the dollar representing a 3 percent drop in the company’s average earnings per share.
“The difference in growth rates between the Magnificent Seven and the rest of the market is key, but I’m much more interested in companies’ guidance on the pro-business narrative than the election,” said Kevin Gordon, senior investment strategist at Charles Schwab.
“We could see a mismatch between foamy animal spirits and potentially disappointing last quarter numbers. I would not agree with the idea of deregulation [under Trump] it will be a big growth story,” he added.
Additional reporting by Ray Douglas
