Earnings Growth Climbs Despite New Concerns About Tariffs

Global earnings growth remained positive in the fourth quarter of 2024 as two of the year’s dominant trends helped power results. Capital spending related to artificial intelligence (AI) and outperformance by Magnificent Seven stocks continued even as uncertainties over tariffs and AI competition surfaced.

Earnings highlights from individual regions include:

• The S&P 500^® Index recorded its sixth consecutive quarter of year-over-year earnings growth.¹ It was the index’s highest rate of growth since the fourth quarter of 2021, and that quarter had an easier annual comparison because of COVID-19. Most sectors reported growth, with financials leading. Energy, materials and consumer staples declined year over year.

• Europe’s EPS growth advanced by 4% year over year.² Communication services, real estate and financials helped drive results, though energy equities remained a drag.

• Japanese earnings growth accelerated by roughly 21% year over year as utilities, energy and consumer discretionary drove relative performance.³ Consumer staples, communication services and materials detracted.

• Earnings from emerging markets increased by 14.43%.⁴ Industrials, IT and health care fueled earnings growth. Real estate, energy and materials were the weakest sectors.

Five Trends Impacting Earnings Growth

1. AI-Related Spending Continued to Show Strength

Large cloud computing providers are increasing their capital expenditures to support their investments in artificial intelligence.

The four largest U.S. hyperscalers — Microsoft, Alphabet, Amazon and Meta — now account for roughly 22% of the overall S&P 500’s spending on capital expenditures. Five years ago, they represented 9%.

These companies spent $223 billion on CapEx in 2024, up 59% from 2023. The debut of DeepSeek’s lower-cost AI model has called into question the need for vast computing resources. Despite this, hyperscalers are expected to spend another $325 billion in 2025, up 46% year over year, based on guidance each company provided in their recent earnings calls.

2. Tariff Policy Emerges as a Source of Uncertainty

Tariffs were top of mind for many companies even if their concern wasn’t reflected in Q4 earnings. The potential for higher tariffs, driven by the new Trump administration, came up frequently during earnings calls.

As shown in Figure 1, the number of companies referencing tariffs during their calls spiked to levels previously not seen since the last Trump administration in 2018.

It’s unclear what the tariffs will look like in practice, assuming the proposed levies are implemented. Companies are providing a wider or more conservative range of guidance. At the same time, Bank of America’s measurement of corporate sentiment set a record high by early February.⁵

3. Earnings Growth Beyond the Magnificent Seven Stocks

The Magnificent Seven, the largest companies in the S&P 500, drove almost all the earnings growth in the index last year. In the fourth quarter, these seven stocks reported earnings growth of 29% year over year, compared to a 13% growth rate for the other 493 companies in the index.

However, analysts are forecasting a smaller gap in the earnings growth of the Magnificent Seven and the rest of the S&P 500. Small- and mid-cap companies are expected to produce positive earnings growth after being negative the past two years, as seen in Figure 2.

4. Banks and Financials Strengthen Developed Markets

In the U.S., financials reported the highest earnings growth among sectors, with banks as the strongest contributor during the fourth quarter. Among financials, insurance was the only industry that didn’t see year-over-year growth.

Results from European banks were in line with those of U.S. peers, with higher trading revenue and revenue from corporate and investment banking. BNP Paribas said its revenue from corporate and institutional banking rose roughly 20% year over year in the fourth quarter.⁶

Japan’s largest banks benefited from higher interest rates, which boosted their net interest margins. Other trends also helped, including increased adoption of online banking, fewer physical branches and reforms to the country’s tax-free savings program, which increased assets.

5. Non-U.S. Stocks Gain from U.S. Market Exposure

Non-U.S. companies found a tailwind by selling in the U.S. end market.

European companies tended to deliver better results if they generated a higher percentage of their revenues from U.S.-based customers. High-end consumer goods, financial services, health care, and software and consulting services all exhibited strong growth from the U.S.

Earnings were also strong for Japanese companies tied to global secular themes such as CapEx spending on artificial intelligence. Keyence, a Japan-based company in the automation field, could benefit if a shift to U.S.-based manufacturing emerges.

Earnings Forecast: Mixed Q1 but Positive Outlook for 2025

Analysts expect S&P 500 earnings to increase roughly 8% in the first quarter of 2025, with growth expanding beyond the Magnificent Seven stocks.⁷ Under current estimates, earnings are expected to grow by approximately 12% in 2025 year-over-year. Changes in tariff policy, taxes and government spending could affect these forecasts positively or negatively.

Non-U.S. developed markets have negative short-term earnings outlooks but positive forecasts for 2025 overall. European earnings are expected to have 4.75% lower growth in the first quarter and an increase of 9.51% for the year.⁸ Japan, meanwhile, could see 8.89% lower earnings growth in the first quarter and a gain of 10% for 2025.⁹

Under current forecasts, emerging markets earnings are expected to increase by 9.89% in the first quarter and grow by 11.61% for 2025.¹⁰