US S&P 500 companies have delivered far better than expected results in Q2CY25. For Q2 2025 (with 90% of S&P 500 companies reporting actual results), 81% of S&P 500 companies have reported a positive EPS surprise and 81% of S&P 500 companies have reported a positive revenue surprise. For Q2 2025, the blended (year-over-year) earnings growth rate for the S&P 500 is 11% against consensus estimates of 4%. If 11% is the actual growth rate for the quarter, it will mark the third consecutive quarter of double-digit earnings growth for the index. From a valuation perspective, the forward 12-month P/E ratio for the S&P 500 is 22.1. This P/E ratio is above the 5-year average (19.9) and above the 10-year average (18.5). At a sector level, commodity sectors - Energy and Materials - were a drag on overall earnings growth. Ex-Energy EPS growth stands at +14% yoy. Interestingly, the spread between Mag-7 and S&P500 ex Mag-7 has narrowed, with ex Mag-7 seeing the best EPS growth in years, at +9% yoy. A weaker dollar helped drive an acceleration in S&P 500 sales growth during 2Q 2025. We expect DXY to remain weak in medium term too and hence act as a tailwind for S&P 500 sales growth. In earnings call transcripts of all the S&P500 companies from June 15 through August 7, the term “recession” was cited on 16 earnings calls conducted by S&P 500 companies during this period. This number is well below the 5-year average of 74 and the 10-year average of 61. In fact, this number reflects a quarter-over-quarter decline of 87% compared to Q1 2025, when the term “recession” was cited on 124 earnings calls. Summary: Corporate margins are still not affected by tariffs incomplete pass through or because of weak US consumer demand. Hence, we believe there is sufficient scope for US corporates to imbibe tariff impact in their margins if consumer demand proves elastic to higher prices. From a valuation point of view, there is still some scope for upward move in broader markets as well as select pockets. Fed rate cuts are still not priced in fully in earnings and we expect a moderately reduced +ve earnings surprise to continue for one more quarter. It is only after Q3CY25 results that we expect some consolidation in US equities.
