Outlook

November 1, 2025

For Stocks, The "Micro" Looks Better Than The "Macro"

For the purpose of this discussion, let’s define the "micro" environment for stocks as being things to which the C-suite is largely in control: sales and earnings growth, productivity, CapEx and financial engineering such as share repurchases.

That differs greatly from "macro" factors to which most companies have little control or no control including tariffs, government regulations, trade, monetary and fiscal policies.

With that in mind, let’s revisit the headline: as measured by sales and earnings growth, the bull market for stocks has largely been justified, though the larger forces at play make today’s premium stock valuations look optimistic and perhaps even risky.

To that end, the really good news is that in the aggregate, America’s captains of industry are successfully navigating the economy’s macro headwinds and providing their shareholders with higher sales and earnings growth.

Indeed, reported third-quarter earnings are better than expected. Reports FactSet: "The percentage of S&P 500 companies reporting positive earnings surprises and the magnitude of earnings surprises are above their 10-year averages." In fact, with each passing week last month, earnings results improved — a relief against the (macro) backdrop of the Trump Administration’s new and sometimes heightened tariffs. On that score, there’s still a lack of clarity as to the extent to which exporters, importers, the consumer, or some combination thereof, are footing the bill. And, of course, it’s still unclear, says Fed Chair Powell, whether these tariffs will be inflationary (though that’s a topic for another day).

In the meantime, the literal bottom line is that S&P 500 earnings have now grown for nine consecutive quarters, while revenue has enjoyed similar improvement with both having easily surpassed analysts’ expectations.

Point of interest: Although some accuse the Fed of imposing monetary policy that has been restricting GDP growth, the soaring federal budget deficit has helped to fuel the economy, but may also be contributing to inflation.

Other key points about earnings:
1. As of Oct. 24, 87% of reporting S&P 500 companies have surpassed EPS estimates;
2. That’s above the 5-year average of 78% and above the 10-year average of 75%;
3. If 87% is the final number for the third quarter, it will mark the largest percentage of S&P 500 companies reporting a positive EPS surprise for a quarter since Q2 2021 (also 87%);
4. In aggregate, corporate earing are on track for a 7.3% gain.

Conversely, sectors reporting year-over-year earning declines have weighed on Select Energy (up 8.3%) and Health Care (up 8.9%) which have dramatically trailed the market’s 17.5% year-to-date gain.

Tacking Into The Wind
No matter how gifted the sailor, it’s impossible to sail into a headwind. Much the same is true for talented corporate chieftains. Fortunately, they’ve actually had some tailwind in the form of 3.8% GDP growth in the second quarter. And while estimates vary, the fourth quarter may see the economy decelerate to a rate of 1.5% to 2.0% — but still growing. And despite fears over AI and recent mass layoffs, the economy is still enjoying "full employment" while second-quarter productivity rose 2.4% (up from a 1.8% decline in the first quarter).

While it’s always worth remembering that Wall Street is not the U.S. economy, investors are forward-looking. So, yes, investors collectively understand that inflation is too high (certainly higher than the Fed would like), and that given the economy’s lackluster growth, interest rates are arguably too high.

Then there are the uncertainties brought by tariffs, new trade agreements, the government shutdown, the growing federal budget deficit and the lack of security felt by white– and blue-collar workers alike that AI is poised to upend their lives. Americans are also concerned about geopolitical changes, and quite simply, some don’t believe the government’s inflation data.

Enter the Conference Board’s Consumer Confidence Index and something called the "vibecession" — the disconnect between solid economic fundamentals and pessimistic public sentiment. Not surprisingly, the "spread" between the two has widened, though the measure has no predictive use for calling bull or bear markets. It does, however, help to explain consumer spending, and in that way it’s worth watching.

While the country’s macro economic outlook remains uncertain, Wall Street is appropriately focused on earnings. As that goes, share prices will continue to follow.

— John Bonnanzio