S&P 500 Earnings Set to Shine: January's Critical Market Test

Key Points

• The Financial Sector is expected to lead the market in earnings growth in Q4. Reports are set to come out in January 2025. 
• JPMorgan Chase reports first and is expected to post a leveraged 40% gain in earnings. 
• The market rally should continue to broaden in 2024, with all sectors posting gains. 

The calendar Q1 2025 earnings reporting cycle is about to shift into high gear, with reports from CQ4 coming from nearly 100% of the S&P 500 NYSEARCA: SPY. The cycle begins on January 15th when JPMorgan Chase & Company NYSE: JPM issues its report, which will likely be strong. The financials are more important than ever this quarter because the sector is expected to lead with growth of over 40%, and the estimates are rising. 

The most significant allocations in the S&P 500 Financial Sector SPDR NYSEARCA: XLF, including JPMorgan, Berkshire Hathaway NYSE: BRK.A, Visa NYSE: V, and Mastercard NYSE: MA are all expected to post high-single-digit to low-double-digit gains, and the smaller companies will grow faster. The sector is also likely to bolster its collective balance sheet, grow its capital position, and remain on track for robust capital returns in 2025. 

JPMorgan remains the largest bank outside of China globally and is expected to report leverage gains on the bottom line. The consensus forecast for adjusted earnings is $3.89, or more than 28% higher than last year. Outperformance is possible because of earnings trends, consumer strength, increased credit use, steady business spending, and higher interest rates. Guidance will also be important. Analysts have set a low bar for 2025, including top and bottom-line contraction that is unlikely given the outlook. The U.S. economy remains resilient, tracking for above 3% growth in Q4 2024 and at least 2% growth in 2025, a cautious estimate. 

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The financials, specifically the large banks, also have a catalyst in the works. The group is set to sue the FOMC over the Basel III endgame and capital requirements and is already spurring the Fed into action. The Fed plans to alter the stress test to reduce result volatility and improve transparency, which is good for bank stocks and the broad market. 

S&P 500 to Accelerate Earnings Growth in Q4 2024 and Fiscal Year 2025

The forecasts for Q4 and 2025 are down from highs set earlier this year but remain strong and align with an outlook for higher index prices for the S&P 500. The forecast for Q4 is a sequential and year-over-year acceleration to 12%, and the final tally will likely be higher. The index typically outperforms the consensus at the start of the season by at least 300 basis points and often up to 1000 or more. Outperformance in Q3 was below the trend at 240 basis points but still solid; the market-moving detail from the Q4 results will be whether outperformance is improving or weakening, a sign that the market is underpriced or fairly valued compared to the consensus estimate reported by MarketBeat. 

Earnings growth is expected to accelerate in 2025. The forecast is for earnings growth to hold steady in the low-single-digit range in the first half and then accelerate to the high teens in the second. The net result should be annualized growth near 15%, or about 550 basis points of acceleration compared to 2024. This growth will be led by Information technology NYSEARCA: XLK and Healthcare NYSEARCA: XLV, which are expected to grow by more than 20%. Coincidentally, both will be aided by AI. 

The good news for index investors is that 2025 may bring reduced volatility. All sectors are expected to grow, and more than half by at least 10%, which should lead to a broader stock market rally than just tech. 

The S&P 500 Is at a Critical Juncture: January Will Be a Telling Month

The S&P 500 is at a critical juncture ahead of the Q1 2025/Q4 2024 earnings reporting cycle, making January a crucial month for the market. The index is trending higher but capped at the 6,100 target and may not be able to move higher. In this scenario, the index could easily enter a correction or become range-bound and end the year lower. However, the index will likely move higher with earnings growth, expected acceleration, and outperformance in the equation. In that scenario, the 2025 EOY target is above 7,000 for the S&P 500.