Earnings Season et cetera
Earnings for the components of the S&P500 beat expectations handily. Earnings are growing by more than 13% year over year, and this is the fifth consecutive quarter to see double-digit earnings growth. Even with significant earnings growth, a flat market, and growth expectations in excess of 10%; the forward Price to Earnings ratio (P/E) is above the 5- and 10- year average forward P/E. Earnings for the Infor Tech sector grew at 20% while energy sector earnings were negative, -.3%. Since October 1, the tech sector etf, XLK is down 1% in price while the energy sector etf, XLE, is up about 25% today.
Despite the strongest revenue growth in 5 years and strong earnings, the S&P 500 index has seen zero growth since the end of October 2025. The previous few years has seen price growth in excess of earnings growth; now we see earnings growth in excess of price growth. Since valuations are rich, price growth, in my opinion, will be capped by the change in earnings. Its as though share prices get bid up first and then earnings ‘prove’ prices are ‘correct.’ A miss in earnings in the future may be more disruptive to markets than one expects.
GDP for the 3rd quarter of 2025 posted an annualized rate of 4.4%. The first read on 4th quarter GDP is 1.4%. The 40-day government shutdown reduced government spending and dragged on GDP. This will likely bounce back in the first quarter 2026 and show a relatively high number. A better measure might be Real Domestic Final Purchases, which grew by 2.9% in Q3 and 2.4% in Q4. GDP grew by 2.2% in 2025, and 2.4% in 2024. The lack of job growth in 2025 puts a large question mark on growth in 2026.
Tariffs are in the news again. Old tariffs were illegal, but we now may see new replacement tariffs. Given the old ones had numerous exceptions and carve-outs, there was minor impact on inflation. If the new general 15% tariff is implemented it too may have little effect, and if it does, the new ones can only be implemented for 150 days without Congressional approval.
Market trends that we saw in 2025 remain intact, with precious metals doing very well and ex-US stocks outperforming US shares. Value stocks have been outperforming Growth stocks for a few months, as is expected in a flat market. If the SP500 can move up out of the range we’ve been in, we could see solid price growth before we enter the next earnings season where, once again, we want to see earnings growth ‘prove’ the price growth.
Adam Waszkowsk, CFA
Director of Portfolio Management
About the Author: Adam Waszkowski, CFA
