What Does Q3 Earnings Season Forecast for 2025?

With more than 95% of S&P 500 firms reporting third quarter results, this earnings season is effectively over. We’ve seen the last fundamental reports for 2024, as fourth quarter results won’t roll in until January and February of next year.

But thinking now about market segments that may have strong fundamental foundations next year, even before new fiscal policy begins to impact growth and sentiment, can be helpful for positioning.

These three earnings season takeaways can help frame fundamentals heading into 2025.

#1 The US is still in the lead, and it’s expected to stay that way

The US has outpaced non-US stock earnings growth for multiple quarters now, underpinning their dominant run of return outperformance. And that earnings trend continued in Q3.

Here is the tale of the tape:

• Earnings Growth: US +6.6% versus +4.5% for the rest of the world, dragged down by the 0.2% growth for Europe¹
• Surprise Percentage: 75% of US firms surprised to the upside versus just 54% for the rest of the world²
• Revenues: US 4.8% revenue growth with 70% of firms having positive revenue growth versus 1.6% growth and 66% of firms with positive revenue growth for the rest of the world³

Moreover, the US is projected to have stronger earnings growth in each of the next four quarters — six percentage points, on average, higher than the rest of the world⁴. As a result, 2025 full-year estimates also are expected to be greater.⁵

What’s next? This US growth advantage could be extended if the Trump administration’s trade policies keep the US dollar strong and higher tariffs and disrupted supply chains restrict non-US growth opportunities. Already, European company transcripts reveal increased caution around the economic outlook.⁶ Growth expectations for 2025 are just 8% for Europe versus 15% for the US.⁷

#2 Misses were punished and beats got rewarded more than usual

While the US beat the rest of the world, not every firm in the US was rewarded. In fact, firms that missed on earnings were punished more than average.

• The average price decrease following earnings reports for firms that had negative earnings surprise was -2.9% this quarter, versus an average -2.3% decline over the past five years.⁸
• For firms that beat, the average price return this quarter was +1.5%, versus the 5-year average of +1.0%.⁹
• Post-earnings one-day outperformance of firms that beat on both sales and earnings was greater in Q3 than over the past five quarters.¹⁰

From a sector perspective, Communication Services, Information Technology, and Health Care had the most firms beating earnings, while Tech and Health Care had the most firms beating on revenues.¹¹  All three sectors had positive average post announcement returns, with Health Care and Communication Services topping all sectors.¹²

What’s next? Positioning toward sectors with strong earnings sentiment may help navigate this asymmetric performance trend, particularly if the macro environment disturbs the market’s temperament. Currently, Communication Services and Financials rank the highest on forward looking earnings sentiment per our sector scorecard.

#3 Financials’ fundamentals have momentum

There are plenty of fundamental green shoots for Financials:

• Projected to have -0.7% growth at the start of the quarter, Financials’ finished the quarter with +7.1%.¹³  This upward revision of more than 7% was surpassed only by the Communication Services and Consumer Discretionary sectors.
• More than 80% of firms beat earnings and 70% beat on revenues, both fourth-best.¹⁴
• Third-best margin improvement from a year ago provides a strong fundamental sentiment indictor.¹⁵

Given this positive momentum, Financials are projected to have the highest earnings growth — +38.4% — of any sector in Q4. That’s well above the market’s +12.2%. And this growth is on sale. Financials’ valuations are trading at larger discount to the market today (-54%) than normal (-44%) over the past 30 years, based on price-to-book.¹⁶

What’s next? Financials’ growth trajectory may continue to improve, driven by both fiscal and monetary factors. The Trump administration’s plans for less regulation in the financial industry and the potential for new fiscal policies to be inflationary and steepen the curve, benefiting net interest margins may add more fundamental momentum.

Also potentially beneficial, the Financials sector derives only 28% of its revenue from outside the US and as it’s largely a service-based industry, that could sidestep tariff-related concerns.¹⁷

Fundamentals Hand the Baton to Macro Trends

With earnings season over, the market now will react more to macro reports than corporate headlines. This could spur macro volatility, given the uncertainty surrounding fiscal policy and still-evolving monetary policy.

Sturdy fundamental foundations may be able to help backstop any macro-led volatility. And, based on the recent earnings results, fundamental trends favor the US and the Communication Services and Financials sectors heading into 2025.