Earnings season insights: What investors need to know

Please note: This article is more technical in nature than our typical articles, and may require some background knowledge and experience in investing to understand the themes that we explore below. All data referenced in this article is sourced from LSEG Datastream unless otherwise stated, and is accurate at the time of publishing.

The latest earnings season may be coming to a close on both sides of the Atlantic, but what can we digest from the results? 

Investors always keep a close eye on earnings, but this season has been particularly telling. Market uncertainty, high valuations and the dominance of a few tech giants have all shaped the landscape. This article breaks down the key takeaways and what they mean for investors.

Why this earnings season matters more 

For the past two years, markets – especially in the US – have soared. The S&P 500 has surged 70% since late 2022, mostly thanks to a small but mighty group of tech giants: the so-called Magnificent 7 (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla).

But with US stocks now trading at historically high valuations, earnings growth is likely to be the main driver of future market gains – unless economic growth meaningfully improves. Right now, markets are leaning heavily on the Magnificent 7 stocks, which contributed over half of the S&P 500’s returns in 2024.

That’s a lot of pressure on just a few companies. If they miss expectations, we could see sharp pullbacks – just like in January, when US tech stocks tumbled following DeepSeek’s latest AI launch in China.

So, as the market matures, investors are likely to shift their focus back to company fundamentals. That’s maybe not a bad thing – as it could mean more opportunities for stock pickers looking for hidden gems.

Some surprises, but mostly positive 

US corporate profits are up 11% year-over-year (at the time of writing), comfortably beating forecasts. In contrast, European earnings have only grown by 2%, although they also came in above expectations. 

The standout performers? Consumer discretionary and communication services stocks in the US have led the charge, both posting over 30% profit growth. While financials, healthcare and real estate have also had strong double-digit profit gains. 

On the downside, energy was the worst-hit sector, with profits slumping more than 30% due to weaker oil prices. Crude oil averaged $70 per barrel in late 2024, about 10% lower than the same period in 2023. Basic materials and industrials also reported weaker earnings.

In Europe, energy, basic materials and utilities saw the largest declines in earnings, while discretionary and healthcare stocks posted the strongest earnings growth. A weaker euro also helped, boosting corporate revenues and helping an above-average number of companies to beat market expectations.

Looking ahead

Barclays’ analysis of European earnings call transcripts shows that companies are still grappling with trade tariff uncertainty and are delaying major strategic changes until more details emerge – with some hinting at potential job cuts. That said, optimism remains in one key area: capital returns – with many companies committed to dividends and share buybacks.

Analysts have slightly lowered their 2025 earnings growth forecasts following the latest fourth-quarter results. The S&P 500 is now expected to see 12% earnings growth, while the Stoxx Europe 600 is forecast at 8% – both down from peak estimates of 15% and 11% last summer.

The market reaction

One of the standout trends this quarter was how markets reacted – or didn’t react – to earnings surprises. 

US companies that beat the expectations of analysts saw little to no boost in their share prices, moving largely in step with the broader market after reporting (suggesting US equities were already priced to perfection before the results were announced – leaving little upside potential). 

This is a shift from previous years, when strong earnings usually led to outperformance. On the other hand, companies that missed expectations were still penalised as usual. Additionally, more companies revised Q1 2025 guidance lower than in the prior quarter.

By contrast, European investors showed greater selectivity, with earnings beats (when a company’s profits exceed analyst expectations) rewarded more than usual, while disappointments led to sharper declines, reflecting rising macroeconomic and political uncertainty.

Investment implications 

The market is shifting – company fundamentals now seem to drive stock prices more than broad economic trends. As uncertainty in trade, fiscal, and monetary policy continues, and AI adoption accelerates, this trend could stick around.

For investors, that means two things: being selective is more important than ever (as broad market gains may be harder to come by), and diversification remains key.

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