S&P 500 Returns Analysis for 2025

Recently, I discussed some insights about the S&P 500 returns expected in 2025. There’s an interesting point to make: when you look at dividend yields combined with earnings growth, they seem to approximately equal total returns. That’s kind of a neat narrative, isn’t it?

Investors have a lot on their minds—things like the Federal Reserve’s actions, geopolitical events, interest rates, and, of course, inflation and economic growth. But, if you take a step back, corporate earnings really drive stock market returns in the long run.

However, it’s important to mentioning that the connection between earnings growth and stock market returns isn’t as straightforward as you might expect this year.

It’s not uncommon for revenues to diverge from market performance. If you glance at the annual returns of the S&P 500, it’s clear that there’s been a fluctuation in how year-end earnings have evolved over the decades—going as far back as 1930.

Typically, the relationship between these growth rates isn’t perfectly linear. In fact, there are numerous years when revenues go up, but profits take a hit, and the opposite can happen too.

Another way to illustrate this is through a visual representation of data. The sectors that have shown the most growth are revenue and inventory. This has been observed in nearly half of the past 96 years. Interestingly, there was an eight-year stretch where both stock prices and profits dropped at the same time.

But then, there are instances where profits decreased even while stock prices climbed. In fact, this occurred 24 times. Conversely, profits sometimes surged while the stock market was in decline, which happened 17 times. So, since 1930, stock prices and profits have often moved in opposite directions, nearly 45% of the time in any single year. A significant portion of the time, the correlation between profit and price growth just doesn’t hold.

This discrepancy can be explained. Earnings reports often come out late, affecting market perception. Sometimes, investors’ expectations can be misplaced. It’s a reminder that while long-term trends exist, short-term market behavior can be erratic. Even knowing what your earnings will be doesn’t guarantee you can foresee how the market will respond.

Stock prices can rise during economic downturns. And when earnings increase, stock prices may actually drop. Emotions, overall market trends, and investor expectations play more of a role in short-term performance than the fundamentals do.

So, as we look ahead, it’s essential to keep this in mind. My colleague and I explored these dynamics in detail during our recent discussion on corporate earnings, small-cap stocks, and the broader stock market.

Also, I’ve been keeping an eye on some interesting readings lately.

Regarding the data, it’s worth noting that 2008 isn’t included in some of the charts since revenues plummeted nearly 80% that year. This necessitated adjustments to keep the graphs clear. Though it’s counted overall, that year’s extreme data point doesn’t visibly appear. The same goes for 2009, when profits dramatically increased.