Market dispersion on the rise: what the earnings season tells us

Please note: This article is more technical in nature than our typical articles, and may require some background knowledge and experience in investing to understand the themes that we explore below. 

All data referenced in this article is sourced from LSEG Datastream unless otherwise stated, and is accurate at the time of publishing.

Key points

• With equities trading at historical highs, and returns concentrated in handful of US tech mega-caps, the latest quarterly earnings season has been a key test for markets.
• US and European earnings reported so far have exceeded analysts’ expectations, but this has not led to positive 2025 earnings revisions.
• Dispersion of equity returns has risen markedly in recent months, with investors’ attention returning to company fundamentals. This trend is likely to persist, given the uncertain macroeconomic and political backdrop. 
• More dispersion is good news for active investors. It creates more opportunities to generate alpha, in a market where broad-based gains might be harder to achieve.

The fourth-quarter earnings season is drawing to a close, with over 70% of US companies having reported results, compared to less than half in Europe, at the time of writing. While the earnings season always attracts investors' attention, this quarter has been particularly significant given the macroeconomic and political uncertainty, elevated market valuations and the extreme concentration of returns seen in a handful of mega-cap technology stocks. This article explores the key takeaways from the latest earnings season, and their implications for investors.

Why this earnings season mattered more than usual

Equity markets have enjoyed a remarkable run over the past two years, particularly in the US. The S&P 500 has surged by 70% since October 2022, primarily fuelled by a small cohort of technology giants — the so-called Magnificent 7 (comprising Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla).

With US equities now trading near historical highs, at 22x forward earnings (37% above their 20-year average), further valuation expansion appears unlikely unless there is a material improvement in the growth-inflation mix. Consequently, future market gains will hinge on earnings growth, especially within the tech sector. The Magnificent 7 alone accounted for 54% of the S&P 500's returns, and 45% of the MSCI All Country World Index’s returns, in 2024.

This reliance on a few high-growth stocks makes the market vulnerable. These companies will need to meet ambitious earnings expectations to justify their lofty valuations. Any disappointment is likely to be met with sharp declines — as illustrated by January’s US tech sell-off, following China-based DeepSeek’s latest Large Language Model release.

As the economic cycle matures and vulnerabilities surface, investors are expected to refocus on company fundamentals. This shift should lead to greater dispersion in stock performance — a positive development for active investors seeking alpha through selectivity and stock-picking.

Key earnings takeaways

At the time of writing, US corporate profits are up 11% year-over-year, while European earnings have risen by just 2%. These figures exceed analysts’ forecasts by 7% for the S&P 500 and 4% for the Stoxx Europe 600, based on Bloomberg consensus estimates.

In the US, the consumer discretionary and communication services sectors have led earnings growth, with profits up more than 30% year-over-year. Financials, healthcare, and real estate have also delivered double-digit profit growth.

At the other end of the spectrum, the energy sector has been the biggest drag, with earnings down by over 30% year-over-year due to lower oil prices. For context, crude oil averaged $70 per barrel in the final three months of 2024, approximately 10% lower than the same period in 2023. The other sectors reporting lower earnings include basic materials and industrials.

Meanwhile, in Europe, the commodity sectors (energy and basic materials) have also reported the steepest declines in earnings, followed by utilities. Conversely, discretionary and healthcare stocks have posted the strongest earnings growth. Notably, a weaker euro has bolstered European corporate revenues, leading to a higher-than-average proportion of sales beats. 

What management teams are saying

Barclays' analysis of European earnings call transcripts suggests a more cautious tone on the economy compared to the previous quarter. Companies remain uncertain about the impact of trade tariffs and await more details, before adjusting their strategies. Some firms have mentioned potential restructuring efforts, including job cuts.

However, European companies remain optimistic about capital returns, with many emphasising their commitment to dividends and share buybacks.

Earnings forecast revisions

Following fourth quarter results, analysts have trimmed their 2025 earnings growth projections slightly for the US and Europe. The S&P 500 and Stoxx Europe 600 are now expected to grow earnings by 12% and 8% in 2025, down from the peak estimates of 15% and 11% respectively, seen last summer.

Market reaction to results

One of the more striking observations this quarter was the market’s reaction to earnings surprises. US companies that exceeded analysts’ expectations saw no material reward, with share prices performing in line with the market on the day following results. This marks a departure from previous years, when earnings beats typically led to share price outperformance. In contrast, earnings misses were punished in line with historical trends. 

This suggests that US equities were priced for perfection and failed to impress, either through earnings delivery or forward guidance. Notably, the proportion of companies guiding first-quarter 2025 estimates lower has risen slightly, compared to the previous quarter.

Meanwhile, investors in Europe have been more discriminating this quarter, rewarding earnings beats more than usual, while imposing steeper penalties for disappointments. This suggests growing investor selectivity in equity markets, amid heightened macroeconomic and political uncertainty.

Investment implications: selectivity and diversification are key

Recent trends indicate a sharp increase in the dispersion of equity returns, associated with a rise in economic policy uncertainty (see chart). Stock price movements are increasingly influenced by company-specific factors, rather than broad macroeconomic drivers.

With economic and political uncertainty likely to persist for some time — across trade, monetary and fiscal policy — and AI technologies being more widely adopted, this trend is likely to continue. Greater dispersion is good news for active investors, as it creates more opportunities to generate index-beating returns, or alpha.

At a time when broad-based gains in equity markets might be harder to achieve, selectivity will be crucial. Diversification across sectors, regions and styles should also remain a priority, as market leadership continues to shift.

US equity return dispersion on the rise, in line with economic policy uncertainty

Dispersion of 12-month stock returns within the S&P 500 in the past 10 years, versus the US economic policy uncertainty index