Key takeaways
Most S&P 500 companies have reported third quarter earnings.
Corporate profits are up, fueled by a growing economy.
2025 projections call for continued earnings expansion.
With most S&P 500 companies already reporting third quarter earnings (a measure of corporate profits), results have modestly exceeded earlier estimates. Earnings appear on pace to grow by more than 4% compared to a year ago. This marks the fifth consecutive quarter of year-over-year earnings growth.1 Corporate profits were bolstered by continued economic expansion, allowing steady earnings improvement.
“The earnings expectations bar was set fairly low for most companies,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “Third quarter performance is sufficient to uphold a continued increase in earnings expectations heading into 2025.”
Despite continued elevated interest rates, the U.S. economy generated surprising growth in the past two quarters. In the second quarter, Gross Domestic Product (GDP) was up 3.0%. Third quarter growth nearly matched that number, at 2.8%.2 “Positive earnings to this point can be attributed primarily to strong consumer spending,” says Haworth.
“The earnings expectations bar was set fairly low for most companies,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “Third quarter performance is sufficient to uphold a continued increase in earnings expectations heading into 2025.”
Through the third quarter, seven of eleven market sectors reported year-over-year earnings growth, with the greatest growth occurring in the communications services and health care sectors. The four remaining sectors that suffered declining earnings included materials and energy stocks.1 Even so, notes Haworth, “Energy earnings, while slower than a year ago, were better than analysts expected.”
One of the most anxiously awaited earnings reports is that of Nvidia. It is one of the last companies to report quarterly earnings and won’t reveal its third quarter profits until November 20. Nvidia, a leading provider of semiconductor chips critical to artificial intelligence (AI) applications, has quickly grown into one of the largest S&P 500 stocks. It’s earnings reports and projections can have significant market influence. “Nvidia’s numbers are important because it tells the markets whether companies are still pouring money into research and development related to AI,” says Haworth.
The environment for corporate profits evolved in recent years. The economic slowdown tied to 2020’s emergence of the COVID-19 pandemic drove earnings lower. As the economy recovered, inflation soared, leading the Federal Reserve to push interest rates significantly higher. Slower economic growth resulted, tempering the pace of corporate earnings growth in 2022, a trend that continued until 2023’s third quarter.
Based on analysts’ estimates, “S&P 500 earnings are projected to come in close to $240 per share in 2024 — about a 10% improvement from 2023,” says Haworth. While Haworth points to remaining challenges given the economy's modest growth rate and elevated interest rates, he says the earnings outlook remains positive. “We’re not seeing earnings expectations for the rest of 2024 or 2025 adjusted lower. That’s constructive for equity investors.” Current projections anticipate a 15% jump in 2025 S&P 500 corporate earnings.1
Earnings are a primary measure of a stock’s individual value. Investors often use a statistic known as the price-to-earnings (P/E) ratio to help determine a stock’s value relative to the rest of the market. In other words, it is the ratio of the current price of a stock compared to the company’s earnings. A stock trading at $30 per share with annual earnings of $2 per share would have a P/E ratio is 15.
When trying to assess which of two stocks offer the best investment opportunity based on their P/E ratios, it’s not always an “apples-to-apples” comparison. “Determining fair value has a lot to do with the underlying growth rate of the industry in which the company competes,” says Haworth. In some cases, investors may be willing to bid up prices based not on current earnings, but on expectations of future profitability. “This tends to be the case, for example, with stocks that invest in new technology that may not have an immediate payoff but offer the potential of future strong earnings if they succeed,” says Haworth. “Other stocks may have lower P/E multiples, but those companies generate steadier earnings, so the payoff on the investment needs to happen in a more compressed timeframe.”
Investors also consider P/E valuations of the broader market. As of October 31, 2024, the P/E ratio of the S&P 500 based on earnings in the prior 12 months was 27.87, while the P/E ratio based on projected earnings for the next 12 months is 21.72.3 Analysts may set different valuations on the market based on varied sets of projections.
With S&P 500 P/E ratios based on projected earnings exceeding 20 times earnings, Haworth says the market may, on the face of it, look expensive, “but we’re in a different state now. Interest rates are elevated, and inflation has come down significantly, so higher market multiples (P/E valuations) may be justified.” Haworth notes that technology-related stocks make up more than one-third of the S&P 500’s valuation in today’s market. “These companies are generally expected to realize faster, long-term growth rates, so they are often valued at higher multiples than other types of stocks.”
U.S. companies appear to be well-positioned for continued earnings expansion. A key factor is the U.S. economy’s ability to maintain solid growth. “To this point, consumer spending remains strong, and that’s the biggest economic growth driver,” says Haworth.
If current economic trends continue, it may benefit a broader stock universe. “In recent times, technology-oriented stocks dominated market performance, but we think we’re seeing some broadening in the market today,” says Haworth. “In the current environment, a globally diversified portfolio puts investors in a position to capitalize on a broad array of opportunities.”
As you assess your investment options and how to best position your portfolio, it can be helpful to do so in the context of a financial plan. Talk with your wealth professional to review whether changes to your investment strategy may be warranted to better reflect your goals, risk appetite and time horizon.
Company earnings typically reflect a firm’s net income, or the money it makes after costs are deducted. The calculation begins with revenue generated over a specific period of time, usually one quarter (13 weeks). Then the cost of sales, operating expenses, interest costs and taxes incurred over that same time are deducted from revenue to determine earnings.
Essentially, they are the same. Other terms used that are comparable to “earnings,” are “net income” and “the bottom line.” Investors will sometimes consider other variations on “profits.” For example, gross profits reflect the direct costs of sales incurred to generate revenue. A higher gross profit reflects significant efficiency in creating products and services that generate revenue. Operating profit takes into account indirect costs, such as marketing and administrative expenses. Net profit is a calculation of operating profit minus interest and taxes. Operating profit is the equivalent of corporate earnings.
As investors assess the financial health of a publicly traded company, earnings, which reflect the “bottom line” for a company, off a the more complete picture. Revenue reflects a company’s income. When calculating earnings, various expenses are deducted from revenue to give a sense of a company’s profitability. A firm may generate significant revenue, but if expenses are too high, its bottom line will not look as impressive. Investors put the greatest emphasis on a company’s earnings, and the pace of earnings growth over time, in determining the appropriate value of a stock.
With inflation retreating and more interest rate cuts likely, how should investors position their portfolios to capitalize on potential opportunities, while guarding against risks?
A fresh look at managing your cash and investments in today’s changing interest rate environment can help support your pursuit of the goals that matter most to you.
Equal Housing Lender. Deposit products are offered by U.S. Bank National Association. Member FDIC. Mortgage, Home Equity and Credit products are offered by U.S. Bank National Association. Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rates and program terms are subject to change without notice.
