Earnings growth uncertain as inflation and policy shifts weigh on corporate outlook

NEW YORK -- Wall Street expects corporate profits to have surged in 2024 and forecasts an even stronger jump for 2025.

Companies still face a long list of uncertainties in the year ahead, including economic policy shifts, reheated inflation and shifts in the jobs market and consumer spending.

Earnings for companies within the S&P 500 are expected to have grown by about 9.4% in 2024, according to FactSet. Companies will start reporting their final quarterly financial results for that year in the next few weeks. It will mark a sharp gain from 1.4% growth in 2023.

Profit growth for companies followed the rising economic tide. The labor market remained strong, helping support consumer spending for goods and services. Prices remain high on many items and services, but the rate of inflation has eased significantly, helping companies lower costs in some cases and relieving some pressure on consumers.

Wall Street's 2025 forecast for over 12% profit growth relies largely on those conditions continuing to prevail. Earnings will be closely-watched as a key measure to justify the broader markets gains.

“With the market looking expensive versus history, it wouldn’t be surprising if earnings growth were a greater driver of market performance than in recent years, making companies’ ability to deliver on profitability estimates all the more critical in 2025," said Ross Mayfield, investment strategist at Baird Private Wealth Management, in a research note.

The Federal Reserve's path ahead for interest rates also remains a factor for companies and consumers looking for less pressure on borrowing costs. The central bank cut its benchmark interest rate three times in 2024.

Expectations for further cuts have been tempered by worries over stubborn inflation. The rate of inflation had eased but remains stuck just above the Fed's target rate of 2%. Recent months have shown signs that it even edged higher.

The Fed has signaled more caution because of inflation worries. Tariff threats from incoming President Donald Trump have fueled those worries on Wall Street. Trump has threatened blanket tariffs on all goods coming into the U.S., which in itself would raise prices for imported goods and raw materials for companies, which typically pass those costs along to consumers. Other nations would likely respond with retaliatory tariffs, which would almost certainly add to pressure on prices for businesses and consumers.

The incoming administration is expected to have a more permissive regulatory attitude for businesses. That could help ease costs for businesses and potentially result in a boost to mergers and acquisitions if there is less antitrust oversight. But, stricter immigration measures could jolt the labor market by producing labor shortages and raising labor costs for employers, adding to inflation.

“The effects of tariffs, immigration restrictions, deregulation, and tax cuts on inflation and broader economic performance vary significantly depending on when and how these policies are implemented,” said Sung Won Sohn, president of SS Economics, in a research note.