Set-up: optimism collides with tariff anxiety

By January 2025 Wall Street had discounted a 10–12 % jump in full-year 2025 profits, emboldened by cooling inflation, solid labour markets, and a second-half rebound in global trade. Yet President Trump’s announcement of 50–65 % “compromise” tariffs on a swath of Chinese imports jolted forecasts, introducing a new cost curve just as companies delivered October–December results. Against that backdrop, the opening fortnight of earnings season carried extra significance for gauging how firms would hedge or pass through higher import costs.

Beat-rates stay high, but upside surprises normalise

With 36 % of the S&P 500 reported by 31 January, 77 % of firms had beaten EPS estimates, matching the five-year average, while the aggregate surprise factor slipped to 5 % versus the recent 8.5 % norm. Early reporters thus met the ‘don’t disappoint’ hurdle but offered less sizzle than in prior quarters. FactSet data showed that companies were beating on the bottom line by finding fresh efficiencies rather than blowing out top-line assumptions.

A return to double-digit growth

Even with a tamer surprise factor, LSEG projected Q4 2024 S&P 500 EPS growth above 15 %, the fastest quarterly increase since late 2021. Unlike earlier rebounds dominated by the technology mega-caps, this re-acceleration was broad-based: nine of eleven GICS sectors posted positive earnings growth, and five grew double digits, reflecting cyclical tail-winds from a capex boom and modest volume recovery in consumer-discretionary categories.

Breadth finally arrives: the “Magnificent 7” share the stage

According to FactSet, the so-called Magnificent 7 still delivered outsized gains—collectively up 36.5 % year on year—but the remaining 493 companies managed 10.6 % growth, their best showing since 2021. Industrial automation firms, payments networks, and hotel/leisure operators each surprised positively, suggesting the profit cycle is widening as post-pandemic service demand normalises.

Tariff clouds and guidance calculus

Earnings calls were dominated by CFO modelling of tariff pass-through scenarios. Retailers estimated a 60–70 basis-point gross-margin hit under a 50 % tariff on apparel, but many flagged accelerated near-shoring to Mexico or ASEAN suppliers. Semiconductor companies, saddled with a 15 % licensing levy on advanced chips sold to China, guided to low-single-digit revenue declines in that geography yet reiterated double-digit global growth thanks to data-centre demand. Management teams overall erred on caution: 55 % of firms issuing guidance tight-ened their 2025 EPS ranges, the highest share since Q2 2020.

Capital allocation: defensive yet opportunity-driven

Share-buy-back authorisations totalled $150 billion during January alone, led by Apple’s record program. Still, capex plans remained ambitious: energy majors devoted an extra 10 % to low-carbon projects, while telecom carriers accelerated fibre roll-outs to meet AI edge-compute needs. The juxtaposition signals that boards see enough visibility to invest for growth yet value the optionality of returning cash if macro risks escalate.

Sector narratives in focus

• Financials. Elevated net-interest margins persisted, but management highlighted growing deposit-beta pressure if the Fed begins the long-premised rate-cut cycle mid-year.
• Energy. Q4 saw a 5 % sequential uptick in Brent, cushioning cash flows. However, supply-chain inflation and higher service costs squeezed upstream margins.
• Consumer Discretionary. Holiday sales were better than feared, but guidance called out weaker February traffic, hinting at tariff-related sticker shock.
• Healthcare. Drug-pricing reforms loomed, yet big-pharma relied on volume growth in oncology and obesity pipelines to post mid-teens EPS gains.

Small and mid-caps: divergence widens

Whereas the Russell 2000 eked out low-single-digit EPS growth, margin compression from wage inflation hurt small-cap discretionary names. Conversely, mid-cap industrial technology companies leveraged pricing power and niche AI demand to deliver 20 %+ earnings jumps, underscoring that the benefits of the AI capex cycle are diffusing beyond megacaps.

Valuation, multiple risk, and the forward lens

The forward 12-month S&P 500 P/E edged up to 21.6×, hovering one standard deviation above its 10-year mean. Bulls argued that a path to 14 – 15 % EPS growth in 2025 justifies the premium, especially with real yields declining. Bears pointed to the tariff shock and nascent wage softness as catalysts for estimate cuts. Options markets agreed: skew steepened in favour of “crash-up” scenarios, signalling appetite for both downside and upside hedges.

Conclusion: profits are resilient, the narrative is fragile

The Q4 2024 earnings season delivered on growth breadth, confirming that U.S. corporates entered 2025 with more operational momentum than headline PMI and consumer-sentiment data implied. Yet the tenor of guidance and the obsessive focus on tariff modelling reveal how policy risk, rather than cyclical demand, may shape the profit trajectory from here. Investors should therefore parse management commentary for signs of pricing power durability, supply-chain agility, and the pace of AI-linked capex—all critical swing variables in translating revenue resilience into sustainable earnings per share. For the moment, the profit engine is humming; whether it can outrun policy potholes will define market leadership in the quarters ahead.