What Happens Next?

The volatility of the stock market over the past two months has been surprising.  The market hit its peak on February 19th and by April 8th, it had fallen 19%.  It then rebounded 20% by May 20th.

The policy reversal on April 9th of the most extreme tariffs certainly triggered the quick bounce on that day, but the steady climb of stock prices from April 21st coincides with strong first-quarter earnings results being reported by companies.  These earnings were reflecting business activity from January through March.

Since stock price moves are ~90% explained by changes in the expectations of the profits of the underlying companies, we have been tracking the trend of quarterly and full-year 2025 earnings for the S&P 500 as the year has progressed.

Notice in the graph above, full-year 2025 profit expectations have been declining since late 2024.  Interestingly, this trend continued even as expectations of first-quarter profits had declined but then materialized in-line with expectations at the beginning of the year as companies reported.

To dig deeper into analysts’ expectations, we examine how expectations have changed by economic sector since the beginning of the year.

Of the eleven major economic sectors, every sector has seen a decline in expectations since the beginning of the year.  Energy has led the way, driven by lower oil prices, followed by Utilities and Industrials.  Financial Services, Technology, and Communications Services have been the most resilient, but still down.

Our takeaway is that the uncertainty over the business environment in the next seven months is creating some downward pressure on earnings forecasts.  It has been our experience that stock prices are especially unpredictable when the uncertainty of profitability is high.

While profits in the first quarter stayed strong, we remain cautious for the rest of the year because of the declining earnings expectations.