What is Supporting Stock Prices?

The stock market has been defying early expectations this year as it continues to climb.  Even the bond market is up this year, as worries over higher inflation have moderated.

The market drop in April following the Liberation Day tariff announcements was reversed by the end of the June. 

We found that the decline and recovery of stock prices followed the pattern of decline and recovery of earnings expectations.

The new year started with high expectations of 14% year-over-year earnings growth and it dropped to 8.3% growth by the middle of the year before moving upward again.  As of last week, expectations are for 12.5% earnings growth for 2025.  Since the year is almost over, Wall Street analysts are usually fairly confident in the outcome by this time.

Detail of the Earnings Strength

While the numbers overall are strong, there is weakness among some sectors.  Here is a breakdown of the earnings growth by economic sector for this year.  They are listed in order of the size of the market capitalization of the sector.

Four of the top five sectors by size are having a very strong year – particularly Technology and Communication Services (which includes Google and Meta).  Consumer-oriented sectors are much slower.  Consumer Staples growth is flat and Consumer Discretionary is showing 5.6% year-over-year growth.  The relative strength of Consumer Discretionary over Consumer Staples is largely due to the strength of Amazon, which is categorized as Consumer Discretionary even though Amazon Web Services (AWS) provides the bulk of its profits.

Conclusion

For anyone following our blog will know, we follow earnings closely for insight into the direction of stock prices.  The biggest sectors represented in the S&P 500 are also the fastest growing in 2025, so it makes sense to us that the stock market continues to climb.

Looking forward to 2026, Wall Street analysts continue their optimism.  Sector growth is more broad-based, with all sectors expecting at least high single-digit growth and technology leading the way again with 22.8% earnings growth currently forecasted.

We expect that these numbers will be fine-tuned between now and the next quarterly earnings season, which starts in January.  If earnings expectations continue to grow, we do believe that stock prices will follow.