The S&P 500 rallied as negative investor sentiment subsided from an all-time high

The equity market rallied

The equity market has been experiencing a wave of optimism, with the S&P 500 rallying to 6,022, achieving a total return of 2.9% year-to-date (YTD) and 6.5% month-to-date. This was not always the case, as the broad market came off its YTD lows of 4,983 on April 8, 2025 (post-“Liberation Day”). Investors were cautious, and the critical question remained around the timing and further details of tariff negotiations.

The AAIIBEAR Index, which gauges negative investor sentiment, reached its all-time high of 61.9 on April 3, 2025, the day after “Liberation Day.” This suggests that about two thirds of surveyed investors expected the market to decline or perform poorly in the next six months. Since then, the index has come down to 41.4, signaling relative optimism. Currently, the S&P 500 is just about 2% away from all-time highs despite the uncertainty from tariff headlines.

Where did this optimism come from? After all, we just went through Q1 2025 earnings, so how did companies perform? What could this mean for your investments? And what should you be informed about to be best positioned in this current environment? If you're curious about all these things, then you're in the right place. Let's break down the recent events and their implications for you.

Investors wondered if this is the end of U.S. exceptionalism

This year, the broad market has faced a push-and-pull dynamic largely due to tariff-related uncertainties. Negative sentiment began early, with the S&P 500 earnings revision breadth becoming more negative as the Q1 earnings season approached. Analyzing the three-month earnings revision breadth, we see more companies revising downwards between February and April, indicating continued negative sentiment.

As the earnings revision breadth in the U.S. remained poor, the upward trend in Europe’s revision breadth signals expectations of strength in companies’ earnings. This has been reflected in the valuation of the Euro Stoxx 50 (i.e., SX5E Index), which increased the next 12 months’ (NTM) projection from 13.6 times to a forward price-to-earnings (P/E) ratio of 15 times using the NTM earnings-per-share (EPS). This multiple expansion of 10.5% has driven the rally in Europe, alongside catalysts such as increased German defense spending, creating a secular tailwind for the region.

The degradation of the U.S. exceptionalism story received more attention, and portfolio inclusion toward Europe became more apparent. Diversification is a common theme, but is the U.S. exceptionalism story still strong? Starting in mid-May, we've observed an inflection in the earnings revision breadth. So what’s changed?

Q1 2025 earnings exceeded expectations

The Q1 earnings season saw companies providing strong growth relative to low expectations. The quarter started with a single-digit earnings growth rate of 7.2% year-over-year, which increased significantly due to growth in eight of the 11 sectors.

At the start of the earnings season, early reporters were in financials, the second-largest sector of the S&P 500 by market capitalization. The financial sector had 25 firms releasing earnings across banks, asset managers, insurance and consumer finance companies, with a beat spread (i.e., percentage surprise) of about 8%. Many of these companies reported strong earnings, with increased expectations for stock buybacks and a reiteration of their 2025 guidance.

Throughout the quarter, the largest contributions to the big moves in S&P 500 quarterly earnings growth were in health care, communication services, information technology and utilities, which achieved double-digit growth. The outcome hinges on information technology, which holds the largest weight by market cap (i.e., 32%) of the S&P 500, and communication services, which includes two “Magnificent 7” household names: Alphabet and Meta. If we include these two tech-adjacent names alongside Amazon in the consumer discretionary sector, technology represents an over-40% weight of the S&P 500.

The current earnings growth rate has risen to 13.3%, with a beat spread of 8%. The market's quarter-to-date bounce reflects a "better-than-feared" reaction to earnings reports. The S&P 500's average price change of +1.9% for a positive earnings-per-share (EPS) surprise explains the favorable price return for eight sectors YTD, despite ongoing trade deal uncertainties. What does this mean for companies in the equity market going forward?

Street expectations for the S&P 500 in the next few quarters project earnings growth rates of 4.44%, 6.97% and 6.23%, respectively, resulting in a 2025 growth rate of 8.8%, compared to 10% in 2024. We expect Q2 estimates to be conservative, with potential upside from information technology, utilities and financials as tariffs begin to impact companies in the latter half of 2025. The longer tariff implementation is delayed, the better 2025 growth prospects appear, allowing companies more time to prepare and mitigate impacts.

Volatile equity market presents a buying opportunity

Amid continued uncertainty, investors could benefit from treating equity volatility as a buying opportunity through actively managed funds. During market volatility and periods of drawdowns, 70% of core managers outperform the S&P 500 on average. This is attributed to most portfolio managers investing with a quality bias, selecting quality companies that have strong track records and underlying fundamentals within a portfolio. In this environment, active management can be especially crucial, as experienced portfolio managers use volatility to find attractive entry points for their high-conviction ideas.

Investing through managed funds offers a strategic approach to achieving your financial goals. You may benefit from investing in platforms that consistently outperform the industry across various equity asset classes, including U.S. Large Cap Core, U.S. Large Cap Value, U.S. Mid Cap, U.S. Small Cap and many others. With portfolio managers leveraging fundamental research at the company, industry and sector levels, the core focus is on long-term performance to generate alpha rather than short-term fluctuations.

Choosing the right portfolio involves strategic and tactical asset allocation, which is essential for mitigating risks associated with adverse events. A team dedicated to risk management and flexible enough to align with your risk appetite, liquidity preferences and time horizon can present a valuable opportunity. Customized portfolios offer the ability to incorporate your preferences and adapt as your wealth goals evolve, providing a tailored investment experience. Investment professionals who actively collaborate with portfolio management teams are well equipped to provide informed investment decisions.

The bottom line

As we navigate the twists and turns of the earnings season, remember that every challenge is an opportunity in disguise. So buckle up, embrace the adventure and let the earnings season be your guide to success. With strategic insights and proactive management, the path to positive returns is paved with potential.

Investors seeking to navigate the unexpected price movements in the markets may want to consider a strategic investment approach through active management. A J.P. Morgan advisor can help you position your portfolio to potentially capitalize on opportunities and mitigate risks effectively.

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