January 15th is the unofficial start of earnings season, with JPMorgan, Citigroup, and other large financial institutions set to report their fourth-quarter financial results.
Investors can't be blamed if they're a little antsy about what companies may say.
After all, the economy has been stronger than many thought over the past year, and better-than-hoped earnings growth was a big reason why the S&P 500 reached all-time highs in December.
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The S&P 500 posted a 7% year-over-year increase in earnings (compared with a quarter-end projected gain of 3.6%) in the third quarter. That strength, particularly within technology stocks, helped stocks finish 2024 with a 23% return - the second consecutive year with gains north of 20%.
Will that trend continue? So far, stocks are off to a rocky start in 2025, and Goldilocks earnings may be required for stocks to continue to gain ground this year.
S&P Capital IQ forecasts year-over-year earnings per share (EPS) growth of 8.7% for the fourth quarter. However, the growth won't be the same for every company. Some sectors could deliver greater profits than others, making those stocks more likely to climb.
Stocks: Q4 earnings winners and losers
Seven of 11 S&P 500 sectors are currently forecast to record not only year-over-year earnings increases but also double-digit gains.
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Analysts expect the biggest fourth-quarter earnings gains within the Communication Services, Real Estate and Information Technology sectors.
The Consumer Staples, Energy, Industrial and Materials sectors are all forecast to generate year-over-year EPS declines.
Looking at sub-industries within the S&P 500’s 11 sectors, nearly 60% of the 146 sub-industry groups tracked are forecasted to generate positive earnings growth.
Broadcasting, paper products, and wireless telecommunications services are anticipated to make the biggest gains in fourth-quarter year-over-year earnings by industry.
Alternative Carriers, including VoIP, satellite communications, and internet-based telephony services, Motorcycle Manufacturers, and Oil and gas Drilling, are forecast to experience the largest year-over-year declines.
Let’s take a closer look at what analysts are saying about earnings at the three S&P 500 sectors that are currently forecast to generate the best growth for Q4:
No. 1: Communications Services stocks, up 23.8%
The sector, which comprises telecom and media companies like Comcast, Meta Platforms, Alphabet, and Netflix, is expected to see fourth-quarter year-over-year earnings grow by 24%
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Analysts at CFRA believe that the outlook for digital ad spending remains favorable. However, given last year's election spending, they also forecast tougher comparisons and suggest that higher AI spending could dent profits, making relative sector outperformance more difficult.
Still, they expect greater investments in Generative AI to drive user engagement and better ad targeting. And they think more advanced models support emerging use cases that could create new revenue streams (e.g., Agentic AI—more on this in an upcoming article).
The two biggest sector players, Meta Platforms (META) and Alphabet (GOOGL) , represent more than 70% of the sector’s weighting by market cap. Both are likely to experience tough margin comparisons in 2025 as they look to monitor cost controls while shifting their costs and investing aggressively in AI infrastructure.
Meta Platforms Q4 earnings are expected to be $6.73, up from $5.33 in Q4, 2023. Alphabet's consensus earnings estimate for Q4 is $2.21, outpacing $1.64 per share last year.
Investors who want to track the sector can consider the Communication Services Select Sector SPDR ETF Fund (XLC) .
No. 2: Real Estate stocks, up 15.6%
CFRA expects the Real Estate sector to post a low-single-digit increase in funds from operations (FFO) during the fourth quarter.
For the fourth quarter, healthcare REITs are the clear leader, with FFO expected to grow the most, while Residential REITs and Retail REITs are expected to post mid-single-digit growth last quarter.
Expectations for Hotel & Resort REITs and Office REITs continue to disappoint, and CFRA expects FFO to decline by a low double-digit in each sub-industry.
CFRA expects industrial and diversified REITs to report mostly flat FFOs compared to the prior year. However, the outlook for industrial space should improve in 2025 due to a pullback in newly constructed space during 2024.
A resilient economy, healthy consumer spending, and historically low vacancy rates in some sub-industries have allowed most REITs to retain their rental pricing power.
CFRA anticipates that the Data Center, Health Care, and Retail (Class A Property) REITs will likely post the strongest fundamentals due to positive supply and demand trends and healthy demand for these property types.
CFRA sees weaker fundamental results for Office REITs, which work-from-home trends have negatively impacted.
There are a number of ETFs that target REITs, including The Real Estate Select Sector SPDR Fund (XLRE) .
No. 3: Information Technology, up 15.4%
CFRA is looking for 15% fourth-quarter semiconductor earnings growth, driven by AI servers, thanks to investment trends tied to greater computing power, networking, and memory.
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Cyclically driven markets (e.g., industrials / automotive) were likely weak last quarter but will progressively improve through 2025 (although CFRA questions the trajectory of a recovery).
One of the most popular technology ETFs is the Technology Select Sector SPDR Fund (XLK) .
What’s next for the Big 3 Tech stocks
The three big kahuna stocks within technology represent about 60% of the overall technology sector.
For Microsoft (MSFT) , cloud revenue will likely benefit from greater AI penetration, led by capacity growth and the deployment of Blackwell-powered AI servers from Nvidia. This could allow sales to accelerate in the next quarter. Analysts expect Microsoft's earnings last quarter to be $3.12 per share, up from $2.93 in the same quarter of 2023.
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They believe Apple (AAPL) saw better-than-expected iPhone 16 shipments during the holiday shopping season. They also think Apple Intelligence is integrating well across the ecosystem, and China looks poised to rebound in 2025, finally supporting Apple's bottom line. Wall Street's average estimate is for Apple to report earnings of $2.35 per share, up from $2.18 last year.
CFRA believes that NVIDIA (NVDA) remains well positioned and has further upside as Blackwell ramps in the first half and takes significant data center wallet share. The consensus estimate for Nvidia's earnings per share is 85 cents, up from 52 cents a year ago.
IT Consulting could see big tailwinds
Customers’ GenAI ambitions remain high, and projects are growing in scope, lifting growth trajectories despite representing a small portion of revenue.
Most companies, such as Accenture (ACN) , continue to see double-digit growth in the related/larger business of cloud migration.
Elevated interest rates continue to discourage discretionary spending, but managed services businesses are getting a boost due to customer cost reduction initiatives. Share repurchases and improving efficiency (aided by internal AI use) continue to lead EPS to outperform single-digit sales growth across the industry.
Semiconductor Materials & Equipment could offer surprises
Looking at the semiconductor space, as export controls have continued to tighten, one key wildcard for earnings season will be where companies’ China exposures end up.
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Most companies project a significant China-related drop-off from Q3 to Q4 (and Q4 into 2025), but CFRA sees China sales generally coming in above projections in recent periods.
Outside of China, AI-related spending continues to outweigh broadening softness in non-AI areas. However, financial issues for the non-TSMC [Taiwan Semiconductor] leading-edge foundries are creating some short-term demand dislocation that may negatively impact Q4 results for related suppliers.
Software stocks could be among the best-in-breed
CFRA expects software demand to be healthy due to interest rate cuts, a favorable policy environment, and AI monetization as customers pivot IT budgets toward AI technologies.
However, interest rates remain elevated, adding some uncertainty to the pace of business spending.
Software providers are raising their investments in AI technologies to compete in AI, especially in infrastructure expansion and building new solutions for customers. On balance, profit margins are still forecasted to remain strong in the next 12 months, and CFRA anticipates continued emphasis on managing and rationalizing expenditures and operational efficiency improvements.
CFRA projects software EPS to rise about 10% in Q4 year-over-year.
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