By Ian Salisbury

It's shaping up to be a strong earnings season -- a sign that 2025 could be another robust year for stocks.

While S&P 500 companies are still in the early stages of reporting December quarter earnings, the numbers look especially promising.

A string of strong reports from Netflix, JPMorgan Chase, and Procter & Gamble has sparked investors' enthusiasm. On Wednesday, the S&P 500 climbed 0.7%, extending the index's 2025 gains to 3.6% while hovering close to its all-time high of 6090.

Overall, about 80% S&P 500 companies had beaten Wall Street earnings forecasts through the end of last week, noted market researcher DataTrek. That's good -- if not quite as good as it sounds. Looking back over the past decade, about 75% of companies manage to report a so-called earnings "beat" in a typical quarter.

There's a longstanding gentlemen's agreement between corporate America and Wall Street that analysts set the bar low, allowing most companies to surpass expectations in most quarters. This song-and-dance gives CEOs a chance to shine, but it also means companies can't simply just beat estimates to impress investors. Rather, their results need to exceed forecasts significantly more than they do in a typical quarter to be considered truly "good" and to drive stock gains.

Still, the fourth-quarter earnings reports we've gotten do bode well for the stock market.

So far, companies have surpassed consensus per-share earnings estimates by 10% -- a better performance than last quarter when they had exceeded estimates by just 5% at this point in the reporting season, according to Bank of America analysts Ohsung Kwon and Savita Subramanian.

Similarly, DataTrek co-founder Nicholas Colas calculates that companies are beating earnings estimates by 9.1%, better than "the 5% earnings beat amount we recently outlined as the target to keep analysts' 2025 estimates intact," he wrote.

But there are a couple caveats: First, only 12% of S&P 500 companies have reported results, according to FactSet, leaving plenty of time for these numbers to change.

Secondly, there are soft spots. "While companies are exceeding earnings estimates because of margin management, we'd like to see better revenue growth as [the fourth-quarter] financial reporting season progresses," Colas says.

And most important, stocks don't have much room for error. In 2023 and 2024, the S&P 500 accomplished something it has only a few times in history -- returning 20% or more two years in a row. As a result, stock valuations have climbed to levels many consider unsustainable. The index now trades at a forward price-to-earning ratio of 21.8, up from 19.5 at the start of 2024.

"The S&P 500 is excessively concentrated and extremely richly priced," wrote Morgan Stanley Wealth Management Chief Investment Officer Lisa Shalett wrote this week. The upshot is that companies will need to deliver in the fourth quarter and beyond if the bull market is to keep charging.

"Earnings expectations are high and in 'show me' mode," she added.

Some companies certainly are showing investors what they've got, helping fuel the market's optimism this week.

"Banks are firing on all cylinders, AI capex [capital expenditure] cycle remains intact, and signs of manufacturing recovery are getting louder," the Bank of America analysts wrote.

Big Wall Street banks, which reported results last week, enjoyed double-digit surges in investment banking revenue in percent terms. JPMorgan, the nation's largest bank by assets, reported a record annual profit, while Goldman Sachs saw fourth-quarter earnings per share more than double. The Invesco KBW Bank exchange-traded fund, a popular fund which tracks the sector, has gained 8% year to date.

Plenty of consumer stocks are off to a healthy start, too. Procter & Gamble stock surged 1.9% Wednesday after beating Wall Street sales and earnings forecasts. Johnson & Johnson also outpaced estimates, although shares slid about 2%.

To be sure, a lot will be riding on technology and communications stocks, which together make up more than 40% of the value of the S&P 500. Most big tech names -- including Apple and Microsoft -- report earnings starting next week.

But early indications are strong. Last week, Taiwan Semiconductor Manufacturing -- which supplies chips to artificial intelligence giant Nvidia -- reported a 57% surge in fourth-quarter profits, lifting hopes that enormous capital spending on AI projects will continue.

Netflix also made headlines with its results, sending shares 9.7% higher Wednesday. A day earlier, the streaming service reported record subscription growth, thanks to events like its Mike Tyson-Jake Paul boxing match, along with a price increase for most U.S. plans.

Now it just remains to be seen whether the remaining S&P 500 companies can keep the earnings beats going -- and keep hopes alive that the bull market can see another year.

Write to Ian Salisbury at ian.salisbury@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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January 23, 2025 02:00 ET (07:00 GMT)

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