Second-quarter earnings season kicks off this week, with the profit growth among S&P 500 companies expected to slow down from double-digit gains the previous couple of quarters. Tariff uncertainty and a mixed sector outlook take some blame.
But some analysts think a positive surprise is in store. One believes S&P 500 earnings could grow 9.5% or even more. For that to happen, historic trends will need to hold up, and some sectors will need to make up for others.
To be sure, analysts' Q2 estimates remain generally subdued. Most expect no more than a 6% increase year over year.
"The second quarter 2025 earnings reporting season for the S&P 500 begins with investors facing a mix of slowing earnings momentum, ongoing macroeconomic uncertainty, and high expectations for the Technology and Communication Services," said Charles Schwab Chief Investment Strategist Liz Ann Sonders and Senior Investment Strategist Kevin Gordon.
First-quarter earnings were a pleasant surprise because analysts undershot on their estimates. Wall Street cautiously estimated EPS to rise less than 8% before first-quarter reports started in April. They ultimately rose nearly 14%.
However, analysts are not extrapolating that same trend for the rest of this year, the Schwab strategists note. "That suggests policy-related uncertainty and instability continues to cloud the outlook; but could also mean the bar has been (yet again) set too low as we move into the meat of second-quarter reporting season."
Low Bar For S&P 500 Earnings
Wells Fargo Investment Institute believes the bar is again too low. Bloomberg earnings revisions appear to have bottomed in recent weeks, the firm said in a report Monday.
In a note to clients Tuesday, UBS said it expects S&P 500 EPS growth of 5% in the second quarter. It blames the slowdown from Q1 largely on the Magnificent Seven, which today account for about 25% of S&P 500 profits.
The seven stocks, which have dominated S&P 500 earnings growth for two years, should see profit growth of about 20%. In each of the previous four quarters, their gains were about 30%.
While analysts say tariffs are important elements of Q2 earnings, companies are better prepared this time around. Liberation Day, when President Donald Trump announced broad tariffs, came just before Q1 reports came out.
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"Relatively speaking, the range of outcomes on tariff policy is getting a bit more narrow, but escalation in the past week is a potential source of downside risk we will be paying attention to," UBS said.
The WSJ Dollar Index is down more than 7% this year, which also affects profits. Historically, for every 10% change in the dollar, S&P 500 earnings have an opposite move of 2.5%. The dollar's decline in the second quarter should mean a 0.5% boost to EPS growth. The dollar's impact should already be mostly reflected in consensus estimates, UBS says.
Republicans' One Big Beautiful Bill includes provisions that should drive a modest boost to S&P 500 cash flows and encourage capital spending, UBS added. Companies, therefore, could increase share buybacks and in turn bolster earnings growth.
S&P 500 Earnings Up 10.5%?
There's a case for S&P 500 earnings to surge 9.5% or even 10.5% in Q2, says John Butters, senior earnings analyst at FactSet.
Over the past 10 years, S&P 500 companies have exceeded estimates by 6.9% on average, with 75% beating the average estimate.
So, from the end of the quarter through the end of the earnings season, the earnings growth rate has increased by 5.6 percentage points on average. Apply this average increase to the estimated earnings growth rate on June 30 of 4.9%, the actual earnings growth rate for the quarter would be 10.5%, Butters said in a report Friday (4.9% + 5.6% = 10.5%).
Crunching numbers for the past four quarters, even a conservative estimate shows second-quarter earnings are likely to climb 9.5%, Butters wrote.
In the early going of second-quarter earnings season, S&P 500 EPS are up 4.8% when combining reported and estimated earnings.
Tech, Communications Lead
Other notes from the FactSet report:
- The Communication Services sector is expected to report the highest year-over-year EPS growth rate of all eleven sectors, 29.6%.
- The Information Technology sector is reporting the second-highest growth rate. Semiconductors and chip equipment (34%), electronic equipment, instruments, and components (16%) and software (13%) show the sector's best profit growth.
- The Energy sector is expected to report the largest earnings decline of all eleven S&P sectors. The average price of oil in the second quarter of $63.68 was 21% below the average price a year earlier, at $80.66.
- Six of the eleven sectors are expected to report year-over-year earnings growth, led by the Communication Services and Information Technology. Five sectors are estimated to have a decline in earnings.
| S&P 500 Earnings Growth Estimates | |
|---|---|
| Second quarter 2025 | |
| Sector | EPS growth % |
| Communications Services | 29.6 |
| Information Technology | 16.6 |
| Utilities | 4 |
| Health Care | 3.3 |
| Financials | 2.4 |
| Real Estate | 1 |
| Industrials | -0.8 |
| Consumer Staples | -3.3 |
| Materials | -3.5 |
| Consumer Discretionary | -5.4 |
| Energy | -25.8 |
| Source: FactSet | |
| Estimates as of July 11 |
