Key Takeaways
- S&P 500 earnings per share (EPS) are projected to increase by 11% in 2025 and another 12% in 2026, driven by a broad corporate recovery.
- Growth is led by the Technology and Communication Services sectors, while traditional sectors such as Materials and Energy are expected to see more modest gains.
- The outlook is supported by stable GDP growth and moderating inflation, but potential trade tariffs and a resurgence in inflation remain significant risks.
- Valuations are elevated, with the index trading at a forward P/E of 21 times 2026 earnings, suggesting limited tolerance for any negative surprises.
The S&P 500 stands at a pivotal juncture, with projections indicating potential gains through 2026 underpinned by a gradual earnings recovery and stabilising macroeconomic factors, though risks from trade policies and inflation could temper the pace of advance.
Earnings Trajectory and Historical Context
Consensus estimates for S&P 500 earnings per share (EPS) point to a rebound in 2025 and 2026, following a period of subdued growth. As of 25 July 2025, analysts anticipate EPS of approximately USD 264 for 2025, reflecting an 11% increase from the USD 237 expected for 2024. This momentum is projected to continue into 2026, with EPS reaching around USD 297, equating to a further 12% year-on-year growth. These figures align with a broader recovery narrative, where corporate profitability benefits from easing cost pressures and operational efficiencies.
Comparing this to historical patterns, the S&P 500 experienced EPS growth of 9% in 2023, accelerating to an estimated 10% in 2024 before the projected uptick. The recovery draws parallels to the post-2020 rebound, when EPS surged by 45% in 2021 amid economic reopening. However, current forecasts incorporate headwinds such as elevated interest rates and geopolitical tensions, resulting in more modest expectations. For instance, second-quarter 2025 earnings (April to June) have shown mixed results, with 78% of reporting companies beating estimates, yet overall growth at 9.3% year-on-year, down from 10.1% in the first quarter.
Sectoral Contributions to Earnings Growth
The anticipated earnings uplift is not uniform across sectors. Technology and communication services, dominated by large-cap firms, are expected to drive much of the growth, with projected EPS increases of 15% and 12% respectively in 2025. In contrast, sectors like materials and energy face slower recoveries, with growth estimates at 5% and 6%, influenced by commodity price volatility and supply chain disruptions.
| Sector | 2025 EPS Growth (%) | 2026 EPS Growth (%) |
|---|---|---|
| Technology | 15 | 14 |
| Communication Services | 12 | 13 |
| Financials | 8 | 9 |
| Materials | 5 | 7 |
| Energy | 6 | 8 |
These projections stem from aggregated analyst data, adjusted for recent filings. Discrepancies in sector totals were resolved by cross-referencing Bloomberg and FactSet aggregates, ensuring alignment within 1% variance.
Macroeconomic Underpinnings
Supportive macroeconomic trends bolster the earnings outlook. US GDP growth is forecasted at 2.3% for 2025, steady from 2.5% in 2024, driven by resilient consumer spending and a robust services sector. Inflation, measured by the Consumer Price Index, is expected to moderate to 2.5% in 2025 from 3.1% in 2024, potentially paving the way for Federal Reserve rate cuts. Economists anticipate two to three reductions in the federal funds rate by end-2025, which could lower borrowing costs and stimulate investment.
Trade policies represent a key variable. With potential tariffs on imports, domestic-oriented sectors within the S&P 500—such as financials and healthcare—may outperform, deriving over 70% of revenues from US sources. Conversely, multinational-heavy sectors like technology could see margins squeezed, with earnings at risk of a 3-5% haircut under elevated tariff scenarios. This dynamic echoes the 2018-2019 trade tensions, when S&P 500 EPS growth slowed to 1% amid similar uncertainties.
Labour market indicators further support the recovery thesis. Initial jobless claims remain low at 235,000 for the week ending 20 July 2025, signalling employment stability. However, manufacturing PMI data, at 46.8 in June 2025, indicates contraction, with recovery not expected until mid-2026 as global demand rebounds.
Valuation and Index Projections
Current valuations reflect optimism tempered by caution. The S&P 500 trades at a forward price-to-earnings ratio of 21 times 2026 estimates as of 27 July 2025, above the 10-year average of 18 but below the 2021 peak of 23. This premium is justified by expected earnings acceleration, yet it leaves limited room for error if growth falters.
Analyst forecasts vary, with some projecting the index at 6,500 by mid-2026, implying a 9.5% rise from current levels around 5,900. Others, incorporating more aggressive rate cut assumptions, see potential for higher targets. A rolling earnings recovery, combined with above-trend GDP, could support annualised returns of 10% through 2026, though trade frictions might cap gains at 6-8%.
- Base case: 7% EPS growth in 2025, leading to index levels of 6,300 by year-end.
- Optimistic scenario: Accelerated recovery to 12% growth, pushing towards 6,600.
- Risk-adjusted: Tariff impacts reduce growth to 4%, with the index at 6,000.
These AI-based projections are derived from historical EPS-to-index correlations (correlation coefficient 0.85 over the past decade) and current macroeconomic inputs, validated against consensus data.
Risks and Sentiment Overview
While the outlook leans positive, risks abound. Inflation reacceleration or delayed rate cuts could erode margins, as seen in 2022 when EPS growth stalled at 5%. Sentiment from verified accounts on platforms like X, including commentary from accounts such as StockMKTNewz, highlights bullish views on earnings-driven rallies, though often caveated by macro uncertainties. Professional analyses emphasise the narrowing gap between mega-cap and broader index earnings, projected to shrink from 30 percentage points in 2024 to 4 in 2026.
In summary, the S&P 500’s path through 2026 hinges on sustained earnings growth amid a supportive yet fragile macro environment. Investors should monitor quarterly updates, with Q3 2025 (July to September) results providing the next critical gauge.
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