May 31, 2025

QuickTakes

MARKET CALL:

S&P 500 Earnings & Valuation

We now have LSEG’s I/B/E/S data for S&P 500 companies’ revenues per share and earnings per share during Q1. Both edged down on a q/q basis but showed solid gains on a y/y basis (chart). The profit margin edged up to 13.3%. Notwithstanding Trump's Tariff Turmoil (TTT), the economy remains resilient, supporting an upbeat outlook for revenues. Earnings should do well too. However, higher tariffs in effect are a corporate tax increase unless corporations can offset them by raising productivity or by passing the cost onto their vendors and/or customers.

During Q1, S&P 500 revenues rose 4.6% y/y (chart). That was below the average over time of 4.8%. As long as TTT doesn't cause a global recession, revenues should continue to grow, though below that average.

During Q1, S&P 500 earnings per share rose 11.1%, well above its 9.0% average over time (chart). It should continue to grow over the rest of this year, though slightly below its average over time because many US-based corporations will have to send the US Treasury a check for the additional costs of Trump's tariffs.

So far, industry analysts still anticipate that S&P 500 revenues per share will continue rising to record highs, as evidenced by S&P 500 forward revenues per share, notwithstanding TTT (chart).

S&P forward earnings per share has stalled at a record high in recent weeks, suggesting that industry analysts may be starting to anticipate that Trump's tariffs will weigh on earnings (chart).

The S&P 500 forward profit margin has edged down slightly from its record high. It has been a reasonably good indicator of the actual profit margin, which edged up slightly during Q1 to 13.3% (chart). Again, Trump's tariffs will squeeze profit margins in the same way as any tax increase does unless businesses can offset their cost by raising prices or getting discounts from their vendors (i.e., overseas exporters).

S&P 500 forward earnings per share is converging toward analysts' consensus expectations for earnings in 2026 (chart). The two will be identical at the end of this year, as they are at the end of every year. The only question is where will the 2026 estimate be at the end of this year? We've been targeting $300 per share. But it just fell below that level last week. We need $300 with a 21.7 forward P/E to hit our 6500 year-end target for the S&P 500. We are counting on the resilience of the economy to work in our favor.

The forward P/E of the S&P 500 has bungeed from 18.0 on April 8 to 21.5 at the end of last week. In other words, stocks aren't cheap again, though much of the rebound is attributable to the Magnificent-7's forward P/E rebounding from 21.9 to 27.4. The forward P/E of the S&P 493 is back to 19.2.

Technical Note: We are no longer using Standard & Poor's series for S&P 500 revenues per share. Instead, we are using the IBES series (chart). The profit margin using the former is only 11.9%, but it’s 13.3% using the latter, which is more consistent with the current forward profit margin of 13.6%.

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