Editor’s note:
5/27/2025 The market is likely to rally on the news that Trump withdrew tariffs on Europe until July 9, 2025. Don’t be fooled!
S&P 500 Earnings Guidance: Navigating Through the Fog of Uncertainty
As Warren Buffett famously said, “Be fearful when others are greedy, and greedy when others are fearful.” Right now, with companies clinging to guidance they can’t truly defend, it’s time for a healthy dose of fear. This has been a bull run in a bear market.
Executive Summary
The Q1 2025 earnings season has revealed a striking dichotomy in corporate America’s approach to forward guidance. While only 3% of S&P 500 companies have withdrawn their annual earnings guidance—a remarkably low figure compared to the COVID-era mass exodus—the underlying data suggests a more nuanced story of corporate caution amid unprecedented economic uncertainty.
The Numbers Tell a Tale of Two Markets
According to FactSet’s comprehensive analysis of 478 S&P 500 companies reporting through May 22, the headline figures appear reassuring:
- 251 companies (52%) provided earnings guidance for fiscal year 2025
- 185 companies maintained or improved their guidance
- Only 8 companies (3%) withdrew or declined to update previous guidance
This stands in stark contrast to the Q1 2020 earnings season, when 185 companies withdrew guidance as COVID-19 lockdowns paralyzed the global economy.
Guidance Breakdown by Category
Companies Providing 2025 Guidance
- Maintained prior guidance: 139 companies (55%)
- Raised guidance: 64 companies (26%)
- Lowered guidance: 37 companies (15%)
- Initiated new guidance: 8 companies (3%)
- Multiple guidance ranges: 3 companies (1%)
Sector Analysis: A Mixed Bag
The sector-level data reveals significant variations in corporate confidence:
Winners: Sectors Showing Resilience
- Utilities (29 companies) and Industrials (28 companies) lead in maintaining guidance
- Information Technology (17 companies) and Health Care (15 companies) dominate in raising guidance
- These sectors benefit from stable demand patterns and clearer visibility into future performance
Losers: Sectors Under Pressure
- Consumer Staples (11 companies) leads in lowering guidance
- Health Care shows a split personality, with 9 companies also lowering guidance
- Consumer Discretionary faces particular challenges from tariff uncertainty
The Tariff Factor: The Elephant in the Room
Despite the seemingly positive guidance statistics, companies are navigating through what many executives describe as “unprecedented uncertainty.” The impact of President Trump’s tariff policies, announced in April 2025, has created a complex web of challenges:
Direct Quotes from the Frontlines
Equifax (Apr. 22): “We are clearly in a period of significant economic and market volatility, principally from uncertainty around tariffs and their impact on US inflation and interest rates.”
CBRE Group (Apr. 24): “Heading into Q2, our strong Q1 performance, strong pipelines and strong current activity, would have prompted us to raise our full year guidance to the high end of the range we set in February. However, given the significant market uncertainty related to tariffs, absent increased interest rate volatility or a recession, we are maintaining our 2025 core EPS guidance range of $5.80 to $6.10.”
Otis Worldwide (Apr. 23): “Moving to 2025 EPS bridge on slide 12. Our adjusted EPS outlook for the year is $4 per share to $4.10 per share. At the midpoint, this includes approximately $0.24 from operational growth, $0.05 of tailwinds from foreign exchange rates, and a net $0.05 benefit from lower share count and higher interest. These are partially offset by a negative $0.12 from the incremental 2025 tariffs currently in place.”
Solventum Corporation (May 8): “Regarding foreign exchange, given the recent weakening of the US dollar, we now estimate currency will have a neutral impact on sales growth for the year. This compares to our prior outlook of a roughly 150 basis point headwind and will have a positive benefit on our reported sales and earnings per share. For earnings per share, we are maintaining our initial $5.45 to $5.65 earnings per share guidance, including estimated tariff headwinds that will impact us during the second half of 2025.”
Early Q1 2025 Results: Beating Expectations Despite Headwinds
As of April 25, 2025, with 36% of S&P 500 companies reporting, the index is showing double-digit earnings growth for the second consecutive quarter. Key metrics include:
- 78% beat rate on earnings (above 10-year average of 75%)
- 8.5% average earnings surprise (above 10-year average of 6.9%)
- Year-over-year S&P 500 earnings growth for Q1 2025 is now seen at 12.9%, up from 8.9% a week ago
However, revenue results paint a more cautious picture:
- Only 62% beat rate on revenues (below 5-year average of 69%)
- 0.7% average revenue surprise (below 5-year average of 2.1%)
Looking Forward: Storm Clouds Gathering
While Q1 results have been resilient, the outlook for the remainder of 2025 is increasingly uncertain:
Q2 2025 Forecast Deterioration
The forecast for second-quarter S&P 500 earnings growth has been falling sharply, and analysts now see growth of 6.9% for the quarter, down from 10.2% estimated on April 1, according to LSEG.
Full-Year 2025 Projections
- Q1 2025: 7.8% growth (actual tracking higher at 12.9%)
- Q2 2025: 6.4% growth (revised down from 10.2%)
- Q3 2025: 8.8% growth
- Q4 2025: 8.3% growth
- Full Year 2025: 9.7% growth
The Magnificent Seven: Still Carrying the Load
Five of the seven companies are in the top 10 list of companies expected to drive earnings growth in Q1–Nvidia, Amazon, Microsoft, Apple, and Meta Platforms. As a group, they are expected to contribute 45% of the net earnings growth in Q1.
Notably, Mag-7 earnings (+18.3%) are expected to outpace S&P 500 earnings by the smallest margin since 2023 Q1. This suggests a potential broadening of earnings growth beyond the tech giants.
Investment Implications
1. Quality Over Quantity
With only 3% of companies withdrawing guidance versus maintaining it with caveats, investors must read between the lines. Companies maintaining guidance “ex-tariffs” are essentially providing conditional forecasts.
2. Sector Rotation Opportunities
The divergence between sectors maintaining confidence (Utilities, Industrials) and those showing stress (Consumer Discretionary, Materials) creates potential rotation opportunities.
3. Valuation Considerations
- Current forward P/E: 19.8x (below 5-year average of 19.9x)
- The forward four-quarter P/E for the [Magnificent 7] group is currently 23.8x–the lowest in three years. (This may bode well for a broadening rally in the 3rd and 4th quarter if the stars align, i.e., tariff clarity, lower tariffs, lower interest rates.)
4. Risk Management is Paramount (heightened volatility ahead)
The wide dispersion in guidance quality and the prevalence of “guidance with asterisks” suggest heightened volatility ahead. Consider:
- Diversification across sectors with varying tariff exposure
- Focus on companies with domestic supply chains
- Monitor companies with pricing power to pass through costs
The Bottom Line: Patience Will Be Rewarded
While the raw numbers suggest corporate America is maintaining its composure through the tariff storm, a deeper dive reveals significant underlying uncertainty. The remarkably low 3% guidance withdrawal rate masks the reality that many companies are essentially providing “guidance-lite”—maintaining targets while explicitly excluding tariff impacts.
Our Outlook: Caution in the Near Term, Opportunity Ahead
Based on our analysis of the guidance trends and economic indicators, we believe the recent market rally has the hallmarks of a bear market rally rather than the beginning of a sustained uptrend. Here’s why:
Second Quarter Strain Ahead!!!
- The sharp downward revision in Q2 earnings estimates (from 10.2% to 6.9% growth) signals deteriorating fundamentals
- Companies are already warning about “softness” in consumer spending and delayed business investments
- The full impact of tariffs hasn’t yet flowed through to corporate earnings or consumer prices
The Silver Lining: A Fed Pivot on the Horizon? As economic activity slows in Q2 and the tariff fog begins to clear, we anticipate this will create the conditions for the Federal Reserve to pivot toward a more accommodative stance. We expect:
- Economic data in Q2 is expected to show a marked deceleration
- Inflation pressures are expected to moderate as demand softens
- The Fed to begin cutting rates in Q3 2025
Investment Strategy: Dry Powder for Opportunity. This sets up a compelling opportunity for patient investors:
- Near Term (Q2 2025): Maintain defensive positioning, take money off the table, and build cash reserves
- Mid Term (Q3 2025): As the Fed pivots and uncertainty clears, prepare to redeploy capital
- Long Term: The combination of lower rates and clearer policy visibility should provide a powerful tailwind for equities
- My opinion: This is a bull run in a bear market, but we are getting close. I expect data to come in weaker than expected in the months ahead, setting up a nice bull run into the end of the year
The Playbook Going Forward
Smart money is rarely early, and it’s never late. I have the following numerous times!
- Raising cash levels!
- Taking profits on recent winners, especially those with high tariff exposure
- Creating shopping lists of quality companies to buy when valuations reset
- Focusing on sectors that will benefit most from rate cuts
Remember, the best opportunities often arise when sentiment is most negative. The companies maintaining guidance today, while acknowledging they can’t quantify tariff impacts, are essentially telling us they’re flying blind. When visibility this poor coincides with stretched valuations and deteriorating growth, prudence suggests stepping aside.
We believe Q2 2025 will mark the earnings trough, with Q3 bringing both Fed accommodation and greater policy clarity. For those with the discipline to wait, the second half of 2025 could offer one of the best entry points we’ve seen in years.
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