Investment Strategy Brief
Earnings Season in the Spotlight
January 19, 2025
Executive Summary
- Q4 earnings season is set to kick off in earnest this week, with expectations for modest growth in aggregate.
- Another quarter of strong Magnificent 7 earnings may soon give way to broader fundamental improvement, justifying a diversified approach.
- Small cap earnings growth is expected to both rebound and surpass large cap earnings growth this year.
- The prospect for broader earnings growth participation favors investment processes that lean against market concentration.
Q4 earnings season is set to kick off in earnest this week, with expectations for modest growth in aggregate
Shown in the left panel is a timeline of the cumulative share of the S&P 500’s market capitalization that will report Q4 2024 earnings results. Shown in the right panel is the blended growth in earnings per share for the S&P 500 and its 11 constituent sectors for Q4 2024 on a year-over-year, percent change basis. Blended growth figures combine actual results with consensus expectations for companies that have yet to report. The S&P 500 is a market capitalization weighted index of large cap stocks in the U.S. Actual results may differ materially from expectations. One cannot invest directly in an index.
- Although a few S&P 500 companies have already reported Q4 results, earnings season is set to ramp up this week with more results expected.
- The S&P 500 is expected to deliver double-digit growth on a year-over-year basis, led by the financials, communication services and technology sectors.
The mega cap earnings gap is expected to narrow in 2025 as broader fundamental improvements take effect
Shown are 2024 and Q4 2024 total returns for various asset classes represented by the following indices: U.S. Large Cap (S&P 500), U.S. Small Cap (Russell 2000), Int’l Developed (MSCI EAFE), Int’l Emerging (MSCI EM), Real Estate (FTSE EPRA/NAREIT Developed), Core Bonds (Bloomberg U.S. Aggregate), Municipal Bonds (Bloomberg Municipal), High Yield (Corp) (Bloomberg U.S. High Yield Ba to B), High Yield (Muni) (Bloomberg Municipal High Yield), Cash (FTSE 3-Month Treasury Bills). Past performance may not be indicative of future results. One cannot invest directly in an index.
- The Magnificent 7 are on track to deliver strong earnings growth this quarter, but the rest of the index is set to start gaining momentum, paving the way for broader improvement.
- As a result, the earnings gap is expected to narrow in the coming quarters, with more sectors showing resilience and potential for growth.
Earnings growth should become more widespread in 2025, which may benefit diversified investment approaches
Data shown in the left panel are the share of stocks in the S&P 500 that have reported positive net income growth on a quarterly basis. Solid bars represent actual results and hashed bars represent projections based on bottom-up equity analyst estimates. Data shown in the right panel are average annualized total returns for the S&P 500 and its equal-weighted variant since 2020 during quarters in which more or less than 75% of stocks in the index reported positive earnings growth. The S&P 500 is a market capitalization weighted index of large cap stocks in the U.S. Past performance may not be indicative of future results. Actual results may differ materially from expectations. One cannot invest directly in an index.
- Since 2020, when more than 75% of stocks reported earnings growth, the S&P 500 has delivered an average return of about 22%, while its equal-weighted variant outperformed with a return of 26%.
- An improvement in earnings growth breadth above the 75% threshold is expected for the majority of 2025, suggesting diversified investment approaches should benefit.
Small cap earnings growth is expected to both rebound and surpass large cap earnings growth
Data shown are the year-over-year growth rates in quarterly earnings for the S&P 500 in blue and the Russell 2000 in green. Solid bars represent actual results, and hashed bars represent projections based on bottom-up equity analyst estimates. The S&P 500 is a market capitalization weighted index of large cap stocks in the U.S. The Russell 2000 is a market capitalization weighted index of small cap stocks in the U.S. Past performance may not be indicative of future results. Actual results may differ materially from expectations. One cannot invest directly in an index.
- Although the S&P 500 has driven earnings growth for some time, small cap earnings are expected to take the lead and significantly outpace large cap stocks in 2025.
- The combination of a strong earnings outlook and fair valuations makes small cap stocks an increasingly appealing choice for portfolio tilts in the current market.
For our 2025 Market Outlook, please view this white paper.
For more in-depth information on this topic, please reach out to your Glenmede Relationship Manager.
This material is intended to review matters of possible interest to Glenmede Trust Company clients and friends and is not intended as personalized investment advice. When provided to a client, advice is based on the client’s unique circumstances and may differ substantially from any general recommendations, suggestions or other considerations included in this material. Any opinions, recommendations, expectations or projections herein are based on information available at the time of publication and may change thereafter. Information obtained from third-party sources is assumed to be reliable but may not be independently verified, and the accuracy thereof is not guaranteed. Outcomes (including performance) may differ materially from any expectations and projections noted herein due to various risks and uncertainties. Any reference to risk management or risk control does not imply that risk can be eliminated. All investments have risk. Clients are encouraged to discuss any matter discussed herein with their Glenmede representative.
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