Q: What is ‘earnings season’ and why is it important for investors?
‘Earnings season’ refers to the period of time when publicly traded companies release their quarterly or annual earnings reports, providing insights into their revenue growth, profitability, expenses, and future guidance. It is a critical period for investors, as it offers a comprehensive view of a company’s financial performance, guidance, and industry trends. By closely monitoring earnings reports and analyst reactions, investors can make more informed decisions, adjust their expectations, and potentially capitalise on opportunities in the market.
Q: The markets have been unpredictable this year. What did Q1 earnings reveal?
First-quarter earnings broadly exceeded expectations, especially in the US. About 78% of S&P 500 companies beat earnings estimates — above the 10-year average of 75%. Key outperformers included healthcare and technology. Initially, analysts were expecting 7% year-on-year earnings growth for the quarter. That figure has since been revised up to 14%. Europe also surprised to the upside, though to a lesser extent. Around 62% of companies in the Stoxx Europe 600 beat expectations, well above the long-term average of 56%. Banks delivered the biggest upside surprise, while consumer cyclicals, particularly in the auto sector, underperformed. European earnings are now running at roughly +3% year-on-year, compared to earlier expectations of a 2% decline. In short, corporate earnings held up well across the board. However, these results largely reflect economic conditions at the start of the year, before recent policy shifts and trade-related uncertainty began to take hold.
Q: If the earnings numbers were so positive, why were markets unimpressed?
Despite the solid earnings numbers, market reaction has been relatively subdued. Companies that beat both earnings and revenue only outperformed the S&P 500 by around 0.5 percentage points the next day. That’s well below the historical average of 1.5 percentage points.
Why the muted response? Much of the earnings optimism was overshadowed by broader concerns — most notably, the reemergence of trade tensions. When the US administration announced reciprocal tariffs in early April, equity markets sold off sharply. Although the decision to delay tariffs by 90 days led to a quick rebound, the episode reminded investors just how sensitive markets remain to policy surprises.
Moreover, many investors suspected that Q1 results were artificially inflated by companies frontloading activity ahead of the tariff implementation. This created skepticism around how sustainable earnings growth will be in the quarters ahead.
Q: It has been hard for investors to predict the markets. What’s the outlook from corporates?
The corporate guidance landscape has been marked by caution. Only 16% of S&P 500 companies issued full-year guidance — well below the long-term average of 40%. For comparison, this number dropped to 10% during early COVID-19 in 2020.
Among those that did provide guidance, the tone was mixed at best. Many companies simply reiterated existing guidance, and the number of profit warnings and project delays was noticeably higher than usual. The ratio of guidance upgrades to downgrades is now at its weakest since the start of the pandemic.
Q: As a result of this disconnect, is investment activity slowing?
Capital expenditure figures initially appear robust. On the surface, S&P 500 capex grew by nearly 19% year-on-year in Q1. But this growth was highly concentrated. Strip out the “Magnificent Seven” and the broader IT sector, and capex growth essentially flatlined.
In fact, it’s the large-cap technology names that are still powering ahead, particularly those involved in artificial intelligence. Hyperscalers such as Microsoft and Alphabet confirmed their investment plans, while Meta even raised its guidance. Altogether, AI-driven capex is expected to grow 35% in 2025, though this marks a slowdown from the 55% pace seen last year.
Semiconductor stocks, closely tied to hyperscaler capex, have already begun pricing in some of this moderation. For that reason, within tech, we currently prefer software over semiconductors and hardware.
Q: Are the current valuations justified?
The S&P 500 is trading at around 23 times forward earnings — an elevated level, particularly given ongoing macro risks. That’s historically high for an environment where recession risk hasn’t been fully taken off the table. Earnings expectations for 2024 have already been revised lower (from 14.5% down to around 10%). But projections for 2025 remain relatively optimistic at 14%, which may prove challenging to achieve if growth slows or trade tensions escalate. This disconnect between lofty valuations and a more uncertain economic outlook is one of the key reasons why we see limited upside in US equities in the near term.
Q: How should investors position themselves moving forward?
We believe it’s a good time for investors to consider trimming some exposure to the US equity market, especially after the strong rebound following April’s tariff-driven volatility. We are not advocating a wholesale exit from US equities. But for those with the flexibility to take profits, now may be an opportune moment to diversify. We continue to recommend reallocating part of that exposure to regions with more supportive macro environments and more attractive valuations — namely, Europe, Japan, China, and India. These markets are generally priced more conservatively, earnings expectations are more grounded, and the policy backdrop is relatively constructive.
Q1 earnings delivered strong headline numbers, especially in the US. But the muted market response, and the cautious guidance that followed, highlight growing investor concern about the macro environment. With US equity valuations stretched and 2025 earnings forecasts looking ambitious, we recommend using current strength to take some profits and rebalance toward regions where the fundamental outlook appears more favorable.
Listen to Mathieu on the Beyond Markets podcast
Tune into the episode ‘What we learnt from an unusual Q1 earnings season’ from 27.05.2025