Corporate Earnings Are (Almost) Back in Full Swing

The U.S. economy has been on a wild ride over the past few years...

First came the pandemic crash that quickly tanked economic activity. U.S. GDP declined more than 28% in the second quarter of 2020... the most aggressive fall in a decade.

Then came the stimulus-fueled recovery, supercharged by government spending and the Federal Reserve's near-zero interest rates. The money supply jumped almost 40% in the two years after the start of the pandemic.

And if that wasn't enough, we grappled with runaway inflation... aggressive rate hikes... and constant recession warnings.

Somehow, through all that chaos, the economy kept chugging along. But while the economy stayed resilient, corporate profits didn't.

Companies struggled to rebuild margins as they faced rising costs, labor shortages, and supply-chain headaches.

It felt like the market had outrun the fundamentals. Investors were left waiting for profits to catch up... or worse, waiting for a huge correction.

But the earnings slump is finally turning a corner. And those fears of a major market correction might be missing the bigger picture.

Corporate earnings have been stuck in the mud since mid-2022...

The economy kept growing. But profits didn't follow. For most of 2023, S&P 500 earnings forecasts were barely moving.

The last time earnings flattened out like that, it was the precursor to a broader market correction. This time, we were told to expect the same.

But something different is happening...

We've seen a steady recovery in earnings forecasts over the past six months. Despite lingering concerns around tariffs and macro uncertainty, analyst expectations for S&P 500 earnings have been climbing sharply.

Take a look at the following chart. It shows Wall Street's earnings per share ("EPS") expectations for the next four quarters at any given time since 1999.

After hitting an all-time high of $240 last April, EPS expectations only took another five months to surpass $250 for the first time. As of March, analysts expect around $270 in EPS over the next year.

Check it out...

This is one of the clearest signs that the earnings hangover is behind us. After two years of stalled growth, profits have started to accelerate.

And this isn't just a sector-driven story...

While AI and technology continue to lead, we're also seeing stronger outlooks in industrials, energy, and even consumer discretionary.

Nearly every part of the market is contributing to the rebound.

This is what a healthy bull market looks like.

Earnings are gaining strength even as investor sentiment remains volatile. The recent pullback could be an opportunity. Valuations have eased from recent highs. And the long-term profit setup continues to improve.

In other words, the market is just starting to catch up with the fundamentals.

The conditions for a continued rally are building. And with corporate profitability finally moving in the right direction, the next leg higher may already be underway.

There are still risks to watch out for. But as long as earnings stay on this trajectory, investors should stay the course.

Regards,

Rob Spivey
April 7, 2025