As companies start reporting their quarterly earnings, the stock market is paying close attention to how businesses are actually doing. With stock prices near record highs, many investors are wondering if these valuations make sense and if companies can keep growing their profits.
Early forecasts suggest that companies ended 2025 with strong growth. Think of earnings reports like report cards for companies—they show how well businesses are performing and if their plans are working. These reports include key numbers that help determine what stocks and bonds are worth.
For long-term investors, growing company earnings have been the main reason stock prices go up over time. What matters most is understanding what these earnings tell us about the economy, consumer spending, and whether the current market can continue.
Growing earnings help your portfolio grow
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Company earnings connect the stock market to the economy. When the economy is healthy with strong job growth and consumer spending, companies typically sell more and earn more profit. Since owning stock means you own a piece of that company’s profits, stock prices usually go up when earnings grow.
This is true not just for individual companies but for the entire stock market. The chart above shows that stock prices tend to follow earnings over the long term. The steady growth of the U.S. economy is a major reason why the stock market has risen over time.
So far, about 13% of S&P 500 companies have reported fourth quarter 2025 results, and 75% exceeded expectations, according to FactSet data.1 Analysts expect earnings-per-share could grow by 8.2% across S&P 500 companies, which would be the 10th straight quarter of growth. For all of 2025, LSEG figures suggest earnings grew by 13% and could grow around 15% in 2026 and 2027. These rates are above the historical average of 7.7%, which would support portfolio growth if they continue.
Stock valuations can improve with earnings growth
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Earnings season also helps us understand stock valuations—whether stocks are priced fairly compared to company profits. The price-to-earnings ratio shows how much investors pay for each dollar of company earnings.
Today, the S&P 500 price-to-earnings ratio is 22.2x, higher than the historical average of 15.9x. While this is elevated, it’s supported by strong earnings growth, unlike periods when investors ignored profitability altogether.
Looking at 2025, the S&P 500 rose 16.4%. If earnings grew 13% over the full year, then earnings contributed about 80% of that return while higher valuations contributed about 20%. This means portfolios did well mainly because companies performed better, not just because investors were willing to pay more for stocks.
However, high valuations mean there’s less room for disappointment, which can lead to bigger price swings during uncertain times. This doesn’t mean avoiding stocks, but it does highlight the importance of managing risk in your portfolio.
AI investment continues to drive spending
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The stock market looks forward, so what company executives say about future plans matters a lot, especially regarding trends like AI spending. Companies are investing heavily in AI infrastructure, including data centers and computing equipment. This investment is changing not just the technology sector but the broader economy.
The chart above shows that earnings growth expectations vary by sector, with Information Technology expecting the highest growth. Companies making large AI investments are betting on continued growth in AI adoption. If these bets pay off, they could drive strong earnings growth for years. However, the full impact of AI on productivity and economic growth will take time to develop. Patient, long-term investors are better positioned to benefit from these trends than those focused on short-term results.
The bottom line? Strong company earnings have supported the stock market. With ongoing uncertainty and high valuations, investors should focus on keeping their portfolios balanced to manage risk while working toward their financial goals.
References
1. https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_012326.pdf
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About The Author
Kevan Melchiorre, CFP®Co-Founder & Managing Partner
Kevan Melchiorre co-founded Tenet Wealth Partners in 2021 with a focus on delivering a premier client experience, supported by an innovative and fully integrated approach to wealth planning. As a CERTIFIED FINANCIAL PLANNER® practitioner with over 16 years of wealth management experience, Kevan partners with affluent individuals, families, and institutions to help align their capital […]
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