How to Capitalize on the First Earnings Season of 2025
Quarterly earnings reporting season kicked off last week with the big Wall Street banks posting strong fourth-quarter results, exceeding expectations in the process.
While it’s still early, with only 10% of the S&P 500’s component companies having reported so far, the results look promising. The average earnings surprise is +9.1%, with 80% of companies beating expectations – well above the 10-year average. Wall Street expects 12.5% earnings per share (EPS) growth year over year for the S&P 500 Index overall, which is a nice bump higher from the 11.5% estimate growth last week.
If that target is reached, it would mark the strongest quarterly profit growth from the S&P 500 in three years. And you can thank the big banks for moving the needle higher – for both EPS estimates and positive surprises.
The Financials sector is expected to deliver an EPS growth rate of +12.5%, and has been the biggest contributor to Wall Street’s increasing EPS estimates over the past month.
Last week, positive earnings surprises from JPMorgan Chase (JPM) ($4.81 actual EPS vs. $4.09 estimate), Goldman Sachs (GS) ($11.95 vs. $8.21), and Morgan Stanley (MS) ($2.22 vs. $1.70) started earnings season on a high note – with all three blue chips beating top-line revenue estimates as well.
Another big factor for S&P 500 profit growth we can look forward to is Healthcare – with 11.2% profit growth expected from the out-of-favor sector overall. But the biggest contributors in Healthcare by far are pharmaceutical stocks, with +60% expected EPS profit growth last quarter!
Just like the big banks, pharma companies are benefiting from the weaker results they reported in the fourth quarter of the previous year – making for far more impressive year-over-year EPS comparisons this earnings season.
That means smaller companies in these two sectors could likewise beat estimates by a wide margin when they report later this season.
Earnings Growth Across the Sectors
Even though Wall Street has high hopes for the S&P 500 this earnings season, it’s important to remember that not all sectors are created equal – and that they aren’t all expected to deliver strong results across the board:
As you can see above, Financials and Communications services have the highest expected quarterly EPS growth rates for the quarter, at +47.5% and +20.7% respectively.
The Technology and Consumer Discretionary sectors are also expected to outpace the S&P 500’s overall quarterly EPS growth of +12.5%.
But you have to pick and choose carefully among the sectors. Four of the eleven S&P 500 sectors – Consumer Staples, Industrials, Materials, and Energy – are expected to report a decline in quarterly EPS this season.
As I’ve noted before, the “Magnificent 7”mega-caps are positioned to have the profit growth spotlight stolen from them this year, as the other 493 companies in the S&P 500 are poised to outpace them in 2025. And sure enough, we’re already seeing evidence of that in last quarter’s EPS growth:
Surprisingly, only three of the Magnificent 7 stocks – Alphabet (GOOGL), Amazon (AMZN),and Nvidia (NVDA) – are expected to rank among the top 10 contributors to S&P 500 profit growth this quarter, as you can see above.
The remaining seven companies in the expected top contributors list are Financials – Bank of America (BAC), Citigroup (C), JPMorgan, and Truist Financial (TFC); Healthcare – Eli Lilly & Co. (LLY) and Merck & Co. (MRK); and just one other tech company, Micron Technology (MU).
All seven are benefiting from weaker results in the prior year, again making for easier year-over-year EPS comparisons – a recurring theme that will keep repeating during all four quarters of 2025.
While the Mag-7 stocks will be fighting to impress against more difficult comparisons to high profit growth in 2024, many of the other S&P 493 will show stronger EPS growth – thanks to easier comparisons to weaker past results.
To capitalize on this trend, focus on stocks expected to post the strongest profit growth as this year rolls on.
With that in mind, I put together a simple TradeSmith screener that scans our database for stocks in the Financial and Healthcare sectors – that also qualify for our TradeSmith Growth strategy.
Screening for Growth
Our Growth screener focuses on stocks with strong sales and profit growth over the past five years. These companies have well established profit growth long term but may also benefit from easier earnings comparisons from last year.
To copy the settings of this screener, take a look at the screenshot below:
As you can see, I’m looking for healthy stocks in our Health Indicator Green Zone – stocks that qualify for our TradeSmith Growth strategy. To broaden my search beyond the S&P 500, I included the S&P Mid-Cap 400 and Small-Cap 600 indexes in our search as well.
That’s because earnings for small-cap stocks are expected to have grown 48.7% last quarter – four times the profit growth of the S&P 500 large-caps!
Next, I zero in on the most appealing sectors of the bunch, by filtering our screen to only select stocks in the Financial Services and Healthcare sectors. These stocks should enjoy the easiest EPS comparisons to last year’s results, which could lead to big profit surprises.
Even though I didn’t use our TradeSmith Business Quality Score (BQS) as a screener filter here – I did sort my results by BQS descending – so the highest quality growth stocks are at the top.
When I ran this screen earlier this week, I found 60 stocks that made the cut. Below is a screenshot of the top 20 stocks sorted by BQS:
Mike Burnick’s Bottom Line: During quarterly earnings season, I always pay close attention to results from the sectors that are expected to report the strongest results. This easy TradeSmith screener can give you a leg up by focusing on stocks in these sectors – with a higher potential for positive profit surprises.
Good investing,
Mike Burnick
Senior Analyst, TradeSmith
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