Taking stock

After three years of rather sluggish earnings growth, especially outside the U.S., our research team sees a better outcome in 2025. We expect global profits to rise 12%, with earnings growing across the major industry groups in every region. As has been the case over the last 15 years, the U.S. leads the way with 14% growth and impressive breadth.

A good year for profits in prospect

We see profits rising across all 16 sectors of our research coverage, and the gap between growth for the so-called “Magnificent 7” and the rest narrowing from over 30% last year to around 13% (Exhibit 1). The 493 stocks in the S&P 500 benchmark not counted in the Magnificent 7 managed only 3% profits growth last year but that is changing. We anticipate that the ending of near-recessionary conditions in much of the industrial sector, continued strength in financial sector profits and the absence of various one-off losses in healthcare will all contribute to market returns in 2025. But the winners do keep winning, and that has been the big theme of the last 15 years in the U.S. stock market.

In our research work, fundamental momentum looks set to continue, but we have to be increasingly careful about the prices we pay. Japan remains another bright spot as corporate reforms drive greater buybacks, dividends and even activist campaigns. In Europe we see a better year, too, although we still expect slower growth than in the U.S. or Japan. China remains the weak spot globally, with few signs of reacceleration in the domestic economy as the struggling real estate sector continues to weigh heavily on consumers and local governments.

Overall we see a good year for corporate fundamentals in the U.S. and around the world. But how accurate are our predictions? We have been making these forecasts for almost 40 years now and on average we are within a couple of percentage points of the outcome. The exceptions, which can be significant, come in those years when the economy is in a recession.

That’s obviously the major risk to our outlook, and with economic growth looking robust and interest rates peaking, that risk looks low at this point. As always, we’ll rely on our intensive dialogue with 3,000 companies around the world, relying on a bottom-up perspective, rather than macro forecasts, to best judge how the profits outlook may be changing as we move through the year.

Momentum is a force around the world

Our analysis of market returns over the last year shows that in all regions, our momentum factor had the strongest influence on stock price performance: Companies with strong trends in profitability had the best returns since 2007. As well as the usual suspects in technology, many financial stocks in both the U.S. and international markets now display strong momentum in profits and stock prices as well. But in other aspects the U.S. looks very different. Our value factor produced only modest returns in 2024 but worked well in Europe, Japan and emerging markets (Exhibit 2).

As value has performed well in international markets, our measure of valuation spreads (the gap between high- and low-priced stocks) has moved steadily lower over the past three years. But it still remains wide by longer-term standards—the current observation is in the 85th percentile of history.

The U.S. really does look different in other ways, too, with superior profits growth, more multiple expansion and a level of market concentration not seen since the 1960s—all driven by strong results and high expectations for the largest companies. Our global investors continue to find plenty of reasons to fully weight the U.S. in portfolios, noting that once stock prices are adjusted for the quality of earnings (higher in the U.S.) and differences in sector mix (more favorable in the U.S.) the rest of the world doesn’t look nearly as cheap.

Value is working in Europe

Much of the sentiment around Europe is very negative given the region’s subdued economic growth, political uncertainties and investor frustration with Europe’s persistent underperformance vs. the U.S. market. But as we’ve discussed, these views are largely reflected in a generous valuation discount.

Meanwhile, we see earnings picking up in 2025. Although many of the major European growth stocks have disappointed of late, we find much better news in other styles and sectors. For example, European banking stocks have returned over 200% in U.S. dollars since “Pfizer Monday” (the November 9, 2020 announcement of a successful Covid vaccine trial). European banks have benefited from better earnings and importantly, a very low starting point after a miserable decade post the global financial crisis.

Value is once again working in Europe. Indeed, across international developed markets, value has outperformed growth by 26% over the last three years. Our value investors have been staying with their winners, as profits have kept pace with price moves, and they see more potential for gains this year.

Exhibit 3 shows the views of our team members. Many favor adding to defensive and higher quality names while remaining cautious about AI stock valuations.

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