Can Earnings Keep Up with Stocks?

The first quarter earnings season delivered solid results, with S&P 500 earnings per share (EPS) tracking to a 13.5% year-over-year increase and 78% of companies beating expectations. Margins also improved, and technology heavyweights continued to outperform—particularly the “Magnificent Seven,” which are expected to contribute nearly half of the index’s earnings growth. However, while the numbers look good on paper, they are largely backward-looking. Investors remain concerned about the path forward, especially given persistent uncertainty around tariffs, which could pressure margins and slow economic growth.

Sector performance was mixed. Healthcare and communication services led the pack, bolstered by digital leaders like Alphabet and Meta. Conversely, energy and consumer staples lagged due to lower oil prices and inflationary pressures, particularly for food producers. Retailers painted a mixed picture, with Walmart warning about potential tariff-related price hikes while some home improvement and auto parts retailers offered upbeat outlooks.

Despite encouraging earnings surprises, forward estimates have begun to decline. Analysts have cut second-quarter EPS estimates at the highest rate in over a decade, reflecting the cloudier outlook. Tariff concerns remain a significant wildcard. Even under a best-case scenario—with tariffs holding at current levels—the drag on corporate earnings could be around 3%. Many companies opted not to provide forward guidance, and those that did were often vague or conditional. Still, a relatively high number of firms raised or maintained guidance, offering a silver lining amid the uncertainty.

Looking at the broader picture, there’s cautious optimism that the foundation of corporate America remains strong enough to weather near-term policy and market volatility. While economic growth appears to be decelerating, resilient consumer demand and robust capital expenditures—especially from mega-cap tech companies—are providing important positive tailwinds. Capital spending not only supports productivity and profit margins but also helps sustain longer-term earnings growth across sectors.

LPL Research maintains a balanced approach in this uncertain environment. Their Strategic and Tactical Asset Allocation Committee (STAAC) holds a neutral stance on equities, with sector preferences leaning toward communication services and financials. Regionally, allocations are aligned with benchmarks, and emerging markets have been upgraded to neutral. On the fixed income side, the Committee prefers mortgage-backed securities over corporates and is waiting for more favorable conditions before extending bond duration. For now, patience and selectivity remain key, as markets digest macro risks and seek clarity on trade and inflation policy.

As always, we will continue to monitor the evolving economic, earnings, and policy landscape to help guide your investments through uncertain terrain.

-Mark & Elise

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All information is believed to be from reliable sources; however, LPL makes no representation as to its completeness or accuracy. This research material has been prepared by LPL Financial LLC. Tracking # (expires 5/26).