For the past two years, U.S. equities could do no wrong. Since the start of 2023, the S&P 500 has rallied 63%, made 58 new all-time highs with 15% lower volatility than average. But with elevated valuations and a lot riding on the AI, 4Q24 earnings are an important fundamental check-up. So far, so good.

With 69% of market cap reporting, our 4Q24 pro forma earnings per share (EPS) estimate is $63.69. If realized, this would represent growth of 3.6% q/q and 15.0% y/y. Revenues, margins and buybacks should contribute 5.2%, 10.8% and -0.9%, respectively. The contribution from margins is elevated vs. the historical average of 2.7% as companies recover from 2023’s inflation, wage growth and supply chain reshuffling. 77% of companies have beaten on earnings, above the 5-year average of 75%, though sales are weaker at 64% vs. 69% given slowing nominal growth. Estimates have been revised up by 3.6% since the start of the year, though there is downside risk as earnings and revenue misses have been punished ( -3.3% 1-day performance) far more than beats have been rewarded (0.7%).

AI names are enjoying prodigious growth, though the S&P 493 should contribute most of the EPS growth this quarter. Elevated rate and regulatory uncertainty have suppressed business activity, with business fixed investment negative for the first time since 3Q21, but a more “pro-business” administration has renewed CEO confidence. This has yet to boost manufacturing, however, leading to another tough quarter for earnings in industrials (2.7%), materials (-1.2%) and consumer durables (-1.6%). Dollar strength and weakness in China and Europe are headwinds across sectors.

Across key segments, several themes emerge:

• Mag 7 defend ROI: With 6 out of 7 reporting, earnings should grow by 27% and have surprised by 6.8%. Capex increased 51% in 2024, though it’s relatively flat as a percentage of earnings (Exhibit 2). As margins and free cash flow come under pressure, markets swiftly punished any miss on monetization. Nevertheless, the results have been promising: billions in cloud revenue, millions in paid LLM subscribers, mid-teens price per ad growth and 30% increases in software engineering productivity.
• Financials lead the pack: Earnings should grow 50.5%, 10.1% above estimates, thanks to a 25% increase in investment banking fees. Revived IPO and M&A activity, a steeper yield curve and prospects for deregulation all signal further upside ahead. Healthy consumer spending is growing credit card balances and the first positive reading of demand for commercial and industrial loans for large/medium banks since 3Q22 augurs well.
• Value-conscious consumer: Spending is supported by 21 straight months of y/y real wage growth, 49 months of job gains and an estimated 19% increase in net worth since 2023. Higher income consumers are enjoying the wealth effect, but domestic retailers, particularly in food and personal care, noted inflation sensitive, lower income customers are trading down.
• Health care is a mixed bag: Payers’ margins are near decade lows, and providers are muddling through inflation and labor shortages.¹ Patent expirations, Inflation Reduction Act price cuts and regulatory uncertainty are clouding sentiment. Nevertheless, M&A is improving profitability and GLP-1s are boosting pharmaceuticals.
• Industrials, old and new: Industrial production grew just 0.5% in 2024. Sales for machinery companies are contracting 6.5%, and transportation companies are plagued by bottoming freight rates and cost inflation. On the other hand, electrical equipment spending for datacenters and utilities should grow 30% vs. 1% for the rest of the industry², while Aerospace & Defense companies are likely to benefit from increased tensions with China.
• Tariffs are a risk across sectors: 43% of reporters have expressed concerns in their earnings calls. Large-cap U.S. tech firms derive 14% of their revenues and 16% of their inputs from China. Consumer companies source 10-80% of their products from China³. Half the EBITDA of the auto industry would be at risk⁴. Risks and opportunities around policy could be influential factors for profits and performance going forward.
   

Mag 7 capex as a % of EBITDA is stable

Taxes and tariffs on profits and performance: Lessons from 2018

Robust profit growth expectations and lofty S&P 500 price targets suggest investors are optimistic about 2025. However, there is deep uncertainty about how tariffs and tax reform may unfold, which could have competing impacts on profits, corporate activity and market performance. As it stands, tariff announcements are underway, but tax reform may not be debated until this spring and implemented until 2026. As investors await further clarity, 2018 may offer clues as to how these policies could impact markets.

In 2018, the implementation of the 2017 Tax Cuts and Jobs Act (TCJA) lowered the corporate tax rate from 35% to 21%, adding an estimated $13 to EPS that year. Profits grew an impressive 21% in 2018 (Exhibit 3), the fastest since 2010, when profits began recovering from the financial crisis. Margins contributed to about half of that profit growth, as the tax cut boosted them to 12.8% by 3Q18 from 10.8% in 2017.

Profits accelerated in 2018, boosted by tax cuts

Revenues were well supported, increasing 7.2% in 2018, as consumers enjoyed an income tax cut. However, consumer spending moderated throughout 2018 and the cumulative effects of tit-for-tat trade tensions beginning in February 2018 weighed on multinational revenue, resulting in more muted revenue growth of 4.1% in 2019. World trade volumes and S&P 500 sales, which have a 0.81 correlation, began to decelerate in the second half of 2018 (Exhibit 4). Approximately 43% of S&P 500 revenue came from foreign countries so a surge in the U.S. dollar and weaker global growth likely diminished revenues. 

The optimism spawned by tax cuts paired with the uncertainty provoked by tariffs had competing influences on how companies used the strong earnings they generated. Announced M&A volumes leapt in 2017 to record levels, and while momentum slowed in 2018, overall volumes and deal count remained elevated (Exhibit 5a). The value of announced S&P 500 buybacks jumped 68% y/y in 2018 (Exhibit 5b). Capital expenditures accelerated at the start of 2018; however, capex and capex intensions decelerated as the year progressed, echoing rising economic policy uncertainty, a measure tracked by the Bureau of Economic Analysis. 

Despite strong profit growth in 2018, the S&P 500 fell -6.2%. Profits helped the index notch 19 new all-time highs, but a hawkish Fed soured returns in Q4. This was exacerbated by the longest U.S. government shutdown in history, trade tension fatigue and thin year-end liquidity. In the end, earnings contributed 16%-points to the S&P 500 return, but multiples subtracted 22%-points. While strong earnings growth underpins returns in the long run, uncertainty can derail a rally swiftly.

In 2018, tax cuts undoubtedly had positive impacts on companies, boosting earnings and profit margins while supporting buybacks and M&A; however, trade uncertainty may have partially offset some of those benefits by weighing on revenues and capex. In 2025, trade uncertainty has ramped up, but any tax reform passed may not be implemented until 2026 and given high deficits, may only contain an extension of the TCJA without additional cuts, limiting the benefit to profits.

Conclusion

While the long-term impact of policy is unclear, the short-term costs of uncertainty could be acute. Over the next few years, policy, rates and AI will pave the path for U.S. equity markets— for better or for worse. Given this, investors should maintain sensible diversification, especially at elevated valuations. Nevertheless, 4Q earnings highlight the fundamental strength of U.S. companies, which should support markets well into 2025. 

¹ McKinsey & Company. Shubham Singhal, Neha Patel and Ankit Jain. “What to expect in US healthcare in 2025 and beyond.” January 10, 2025.

² J.P. Morgan Investment Bank. Tami Zakaria, Alec McGuire and Raquel Betesh. “Construction OEMs & Rental Players: 2025 Outlook & 4Q24 Preview.” January 14, 2025.

³ J.P. Morgan Investment Bank. Andrea Teixeira. “U.S. Beverages, Household & Personal Care: 2025 Outlook.” December 2024.

⁴ J.P. Morgan Investment Bank. Ryan Brinkman, Rajat Gupta and Jash Patwa. “4Q24 Auto Parts Supplier Preview.” January 27, 2025.

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