2025 Profit Forecasts: Risk or Opportunity?

High Valuations Raise the Stakes as Q4 Earnings Forecasts Decline

As the year winds down, Wall Street analysts are once again trimming their profit forecasts for the next calendar year—a common practice during the fourth quarter. By mid-November, estimates for S&P 500 earnings in 2025 had fallen to $274.96 per share, down from $279.68 in June and $276.66 in September, according to FactSet.

While it’s typical for earnings projections to dip late in the year, this year’s revisions have come at a slightly faster pace than usual. Since the start of Q4, forecasts have dropped 0.6%, aligning with the 15-year average but outpacing the five-year trend, notes FactSet’s John Butters.

Ordinarily, these adjustments garner little attention from investors, who focus more on actual earnings reports. However, with the S&P 500 trading at a historically high 22 times forward earnings, the stakes are elevated. Further downward revisions could sap confidence in the market’s ability to deliver double-digit profit growth.

Elevated Risks Amid Lofty Valuations

“The stakes are higher because valuations are higher,” says James St. Aubin, chief investment officer at Ocean Park Asset Management. Analysts are projecting S&P 500 earnings growth of 12% for 2025, compared to 9.4% for 2024. While these figures remain optimistic, any continued weakening in forecasts could amplify market pressure.

Recent declines in the market underscore these concerns. Investors are grappling with the likelihood that the Federal Reserve may take a slower approach to cutting interest rates. Coupled with falling profit expectations, this dynamic could create a headwind for equities in the near term.

Broader Earnings Growth Faces Challenges

Optimism for a broader earnings recovery beyond Big Tech in 2025 has also dimmed. While technology and communication services companies have seen improved profit outlooks, other sectors, including healthcare, consumer staples, energy, and utilities, have faced downward revisions.

This trend underscores the ongoing concentration of earnings growth among a few major players, such as Nvidia, which has led the charge in driving the S&P 500’s gains over the past year. Meanwhile, small-cap stocks, which had shown early signs of recovery, are seeing diminished profit expectations, further challenging hopes for a more inclusive market rebound.

Policy and Economic Uncertainty Add to Risks

Beyond earnings revisions, broader economic and policy uncertainties loom. While potential corporate tax cuts and deregulation could bolster profits, risks such as renewed trade tensions under a Trump administration could disproportionately impact large-cap companies with significant international exposure.

“The risk of trade wars and tariffs could become a significant drag on multinational corporations,” warns St. Aubin.

Market Sentiment at a Turning Point

Looking ahead, investors face critical questions about whether companies can deliver on expectations for double-digit profit growth. Any signs of narrowing earnings beats or continued revisions downward could weigh heavily on sentiment, particularly in an environment of high valuations and macroeconomic uncertainty.

“The optimism around earnings has been one of the few bright spots keeping markets afloat,” notes Josh Emanuel, CIO at Wilshire. As pressure mounts, the coming months could test the resilience of bulls in a market already facing significant headwinds.