Strong Q1 Earnings Mask Underlying Worries
The numbers are in, and on the surface, they look pretty darn good. Q1 earnings for the S&P 500 clocked in at a robust 12.8% year-over-year growth, well above the 7.2% forecasted at the end of March. That’s not just a little beat—it’s a blowout.
Out of 358 companies that reported so far:
- Over 75% topped their EPS estimates
- Revenue growth landed at 4.8%, slightly ahead of the 4.4% projection
But let’s not pop the champagne just yet. Beneath the shiny surface, there’s some murky water:
- Only 48% of companies beat sales estimates, compared to the long-term median of 58.1%
- 32% actually missed sales expectations—the worst since Q1 of 2020
Yikes.
Sector Performance: The Good, the Bad & the Shrinking
It wasn’t all winners this quarter. Sector performance painted a mixed picture:
🔥 Sector Leaders:
- Healthcare: +46% YoY earnings growth
- Communication Services: +20%
- Information Technology: +17%
🧊 Sector Laggards:
- Energy: –20% decline, driven by falling crude prices
- Consumer Staples: Margins squeezed by inflation and pricing pressure
- Materials: Struggling with both input costs and demand softness
The Energy sector in particular got hit hard as crude oil prices dipped from $75 to $70/barrel over the quarter.
What About Accounting Quality?
Now here’s where things get a bit sketchy. While EPS beats made headlines, the quality of those earnings is under scrutiny. According to Bloomberg Intelligence:
- Only 34% of EPS beaters showed improved accounting quality (down from 44% last quarter)
- This suggests companies may be leaning on aggressive accounting tactics to make numbers look better than they are
One red flag? The growing gap between companies’ GAAP multiples and cash flow multiples—a trend that’s been widening for over a decade.
In plain English? It’s getting harder to tell if these profits are real or just smoke and mirrors.
Forward Guidance: A Cloudy Crystal Ball
If you thought Q1 was strong and assumed that’d lead to bullish forward guidance… think again.
Here’s the reality check:
- A record-high 38% of S&P 500 companies issued negative EPS guidance
- Only 15% gave positive guidance
- That’s the biggest negative spread since the financial crisis
Even worse, several companies—including names in automotive and airlines—have withdrawn their guidance altogether. That’s rare, and it screams uncertainty.
A big chunk of that uncertainty is tied to tariffs.
Trade Jitters on the Rise:
- 51 companies mentioned tariffs directly in their earnings guidance
- Over 1,100 mentions of tariffs were found in company transcripts
- Most of those mentions came from industrial companies, the ones getting hit hardest
Some even phrased guidance as “excluding tariffs” or “not reaffirming” due to trade policy swings.
Market Reaction: Shrugging Off the Good, Punishing the Bad
Investors aren’t as excited as the headlines suggest. Here’s how things looked on the trading floor:
- Stocks beating EPS barely moved the needle
- But those that missed got hammered, dropping an average 4.28%—the worst reaction since 2017
And confidence among CEOs? Well, it’s slipping. The CEO Confidence Index saw its biggest drop since Russia invaded Ukraine.
Valuation Check: Are We Overpaying?
Despite a modest YTD pullback of –3.5% through May 5th, the S&P 500 remains richly valued:
- Forward P/E ratio: 20.2x
- That’s above the 5-year average (19.9x) and 10-year average (18.3x)
- Net profit margins? 12.7%, slightly up from last quarter
Our take? Even with strong earnings, the S&P 500 still appears ~15% over fair value.
If earnings forecasts don’t hold up—especially if tariffs bite deeper—these valuations could become a liability.
Looking Ahead: Expectations vs. Reality
Here’s the market’s current outlook for full-year 2025:
- Earnings growth: 10.1%
- Revenue growth: 5.0%
That’s down from 15% earnings growth projected back in January. So yes, estimates have been trimmed, but not dramatically. Why?
Because investors are waiting to see what happens with the 90-day trade negotiation window, set to close in late July.
If no deal is reached? Brace yourself—those projections will likely be cut further.
Key Takeaways
- Earnings beat the street in Q1, but sales surprises were underwhelming
- Sectors like Healthcare and Tech continue to shine, while Energy and Staples struggle
- Accounting quality is slipping, hinting at possible profit inflation
- Forward guidance is cautious, especially due to tariff-related uncertainty
- Valuations remain high, despite recent market pullback
So, What Should Investors Do?
Let’s be real—markets are walking a tightrope right now. With valuations stretched, trade risks rising, and earnings quality slipping, it’s time to look beyond the usual suspects.
Here’s where savvy investors can start positioning for private market alpha—and it’s not just about dodging volatility, it’s about tapping into consistent, often tax-efficient, return streams.
🔐 Consider These Private Market Opportunities:
🏦 Private Credit
- Yields? ~10%
- Historical returns? Averaging 12%
- What’s the edge? Predictable cash flow, less correlated to public market swings, and increasingly attractive in a higher-rate environment.
📈 Private Equity
- Long-term outperformer with returns 2x the S&P 500
- And get this—roughly half the volatility
- Ideal for patient capital seeking meaningful growth without the rollercoaster ride of public markets.
🏗 Infrastructure & Private Debt
- Real-world, essential assets like energy, utilities, and transportation
- Offers inflation protection and resilient cash flows
- A solid hedge in uncertain macro environments, especially when public markets are pricing in too much hope.
🏢 Private Institutional Real Estate
- Delivers an efficient dividend of ~5%, with 90% of that dividend being non-taxable
- Average return of 9.5% over the past six years
- Crucially: Positive performance during tough markets, including 2020’s COVID crash, 2022’s bear market, and even now in 2025, up 2.5% year-to-date despite tariff headwinds
Why Go Private Now?
Here’s the deal: With public markets pricing in perfect outcomes and the Fed navigating a tricky landing, private markets offer diversification, downside protection, and access to long-term outperformance.
In short:
- You get yield (hello, 10% private credit!)
- You get growth (private equity outperformance with less risk)
- You get stability (infrastructure, real estate, and private debt that don’t flinch when headlines do)
Looking to integrate private market opportunities into your portfolio? Let’s explore how to tailor exposure to match your income goals, risk profile, and long-term strategy.
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Thank you for your continued trust and engagement.
Tony Gomes, Author, MBA
CEO and Founder
Advanced Wealth Management
Content Disclosure: The information here is general and educational. It is not a substitute for professional advice and does not constitute a recommendation. Forecasts and opinions are subject to change.
