US equities: Earnings growth is key for sustained market gains

As we enter the second half of 2025, a mix of lofty valuations and macroeconomic uncertainty could bring challenges for equity markets, but we see encouraging trends. Equities have certainly demonstrated their resilience this year, and disruptions in market momentum can create compelling opportunities. So far, “two-way” volatility has been a feature of the 2025 equity market. Historically sharp losses in early April were followed by a remarkable recovery and record highs for the S&P 500 Index and Nasdaq by the midpoint of the year. Investor sentiment has also been “two-way”—pivoting from extremely bearish to bullish over brief timeframes. At this point, non-US markets appear to have more tailwinds than US markets. Those tailwinds include increased government spending, a weak US dollar, easing inflation pressures, commitments to increase government spending, and low valuations relative to US equities.

A mix of uncertainty and resilience

Importantly for investors, a plethora of negative scenarios have not materialized. Despite consumer sentiment hitting historically low levels, US consumer spending overall has remained resilient. Despite tariffs, inflation has remained in check. And, amid concerns about corporate earnings, aggregate earnings growth has remained stable and we’re seeing estimates of yearly double-digit growth for calendar 2025 and 2026.

At the same time, important uncertainties remain. Issues for investors include the unpredictability of tariff policies and implementation, new government policy initiatives, and increasing global geopolitical conflicts with no immediate end in sight. In addition, there are ongoing questions about the sustainability of artificial intelligence (AI) spending and infrastructure growth as well as how the deployment of AI applications will impact businesses. Also, as businesses grapple with AI and tariff uncertainty, they are pausing investment and hiring decisions. As for the “The Big Beautiful Bill” recently signed into law, so far it has been a “yawner” for the bond market. But as US government deficits climb, a change in sentiment could lead to higher long-term bond yields, which, by extension, would weigh on the equity market.

The S&P 500 forward price/earnings multiple is more than 20 times a heady 2026 earnings estimate.¹ When stocks are expensive, earnings—and earnings growth—matter. Without much upside potential for multiples, earnings will be key to supporting equity prices for the remainder of the year.

Implications of Trump administration policies

A central goal of US President Trump’s agenda is to revive industrial production, manufacturing and mining in the United States. As debate continues over the best tactics to achieve this goal, these efforts are expected to gain momentum, though their impact may not be uniform across all regions.

Among US equities, some of the biggest opportunities are expected in the industrials, materials, and utilities sectors, particularly through the construction of new manufacturing facilities and the procurement of energy to operate them. While traditional manufacturing sectors such as automotive often dominate the headlines, the strategic focus is increasingly on industries such as AI, semiconductors, biopharma (including vaccines) and critical minerals. These sectors are seen as critical to national security and economic competitiveness, as opposed to the less strategic consumer goods industries.

Several trends could boost equity returns

Despite the macroeconomic challenges, we see many promising trends for equities. Large-cap companies, for example, continue to impress, with many showing remarkable double-digit organic revenue growth.

AI offers compelling opportunities that transcend the technology sector. AI is evolving at a staggering pace, offering investors new subsets of potential winners and a wide array of potential use cases. The DeepSeek panic at the start of the year seems like a distant memory as AI investment plans move forward unabated and capital expenditure projections rise. Meta Platforms, for example, has been a clear beneficiary of the AI productivity boost, with accelerating revenue growth and enhanced productivity. When assessing businesses, a key question is whether AI is an opportunity or a threat—which companies will benefit and which will be disrupted? The answers will unfold over the coming quarters and years.

Looking ahead, we expect active managers could benefit from a wider dispersion of returns in the equity market. To date this year, approximately 45% of stocks are outperforming the S&P 500 Index.² While this is typical versus history, it is notable compared to last year, when just 19% of stocks outperformed. Also notable is the more varied returns for the Magnificent Seven in 2025 after their remarkable outperformance and dominance in 2023 and 2024. While choppy markets and uncertainties will remain with us in the months ahead, so too will attractive opportunities for active investors focused on fundamental research.