If you’d have said that corporate profits at publicly-traded companies would be skyrocketing in the wake of new tariffs that lifted import taxes to the highest level since 1934, I would have called you daft.
Yet, that’s what’s happening. S&P 500 companies are experiencing significant profit growth despite the effective tariff rate increasing to 17.9% from 2.4% in January, according to the Yale Budget Lab.
The lesson: Never underestimate the ability of companies to make lemonade out of lemons.
S&P 500 returns by month (2025):
- January: 2.7%
- February: -1.42%
- March: -5.75%
- April: -0.76%
- May: 6.15%
- June: 4.96%
- July: 2.17%
- August: 1.91%
- September: 3.53%
- October: 2.27%
Source: YCharts.
Third-quarter earnings per share growth for S&P 500 members is expected to climb 10.7% year over year, which would mean these companies have notched double-digit earnings per share growth in four consecutive quarters, according to FactSet. The earnings strength is providing much-needed support to stocks, helping the S&P 500’s price to earnings ratio (p/e ratio) keep from running any higher than it already is.
The benchmark index is up 16% year to-date and a staggering 36% since April 8’s low. The move up in the S&P 500 has taken it to all-time highs, lifting its p/e from about 18 to nearly 23 — levels that, historically, have preceded lackluster full year returns.
The market’s big move since April’s bottom has unlocked animal spirits, something that’s caught the eyes of Goldman Sachs CEO David Solomon. Solomon has been tracking markets professionally since the 1980s, joining Goldman Sachs in 1999. His long experience suggests investors should pay attention to his latest message on the market regarding risks.
Stocks climb wall of worry on Fed cuts
The S&P 500 has a shot at a third consecutive year of greater than 20% returns. The gains are even more impressive for high-technology driven Nasdaq, which is up over 18% in 2025 and more than 54% since the April low.
The move upward followed a sharp 19% sell-off in the S&P 500 from all-time highs in February through President Trump’s about-face puasing of reciprocal tariffs on April 9.
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Stocks have consistently climbed the proverbial wall of worry over tariffs partly on optimism that White House jaw-boning and a deteriorating jobs market would force the Federal Reserve off the sidelines to cut interest rates.
Now that those hopes have played out with quarter-percentage point cuts in September and October, there’s concern that the Fed may sit on its hands when it meets again in December. If so, then chatter over the Fed falling behind the curve on rate policy will likely grow louder as people start debating recessionary risks if inflation and unemployment keep climbing.
In August, the Bureau of Labor Statistics says unemployment reached 4.3%, its highest level since 2021. The Consumer Price Index showed inflation was 3% in September, up from 2.3% in April.
In short, worry remains but far fewer investors are in cash than even a few months ago, providing less dry powder to help push stocks to increasingly new highs.
Goldman Sachs CEO delivers frank reminder on stocks
Solomon’s lengthy career means that he’s navigated Black Monday in 1987, the Savings & Loan Crisis in the late 1980s and early 1990s, the Internet boom and bust, the Great Recession, the Covid pandemic, and 2022’s bear market. He’s seen his share of good and bad markets.
While it’s easy (and tempting) to extrapolate bull markets into the future, the reality is that the stock market has a way of disappointing the masses. The more people who are caught up in a speculative frenzy that’s created a bubble, the greater chance that bubble will pop, taking stocks significantly lower.
Nobody rings a bell signaling stock market tops or bottoms, but anyone who has been around a while will tell you that pullbacks, corrections, and bear markets are common.
How often do pullbacks, corrections, bear markets happen:
- 5%-10% pullbacks: 3.4 times a year,
- 10-20% corrections: 1.1 times a year
- 20%+ bear markets: Once every 3-4 years
Source: LPL Financial.
At Italian Tech Week in Turin, Italy, Solomon reined in some enthusiasm with a stark reminder that stocks don’t go up in a straight line, and that many who are betting on increasingly higher returns may be disappointed within the next year or two.
“I think that there will be a lot of capital that’s deployed that will turn out to not deliver returns,” said Solomon, according to CNBC.
Solomon pointed toward optimism over artificial intelligence, which has propelled Wall Street darlings like Nvidia, Microsoft, Alphabet, and Palantir to spectacular highs. A lot of money is flowing into developing AI apps and agentic AI, propping demand for these companies. Still, that story is mostly main stream now, and stock returns, historically, are best when a story is emerging and not yet held by most as common wisdom.
“Markets run in cycles, and whenever we’ve historically had a significant acceleration in a new technology that creates a lot of capital formation, and therefore lots of interesting new companies around it, you generally see the market run ahead of the potential … there are going to be winners and losers,” reminded Solomon.
Recall the dotcom bubble as exhibit A. The S&P 500 delivered five consecutive years of solid gains from 1995 to 2000 before the bubble popped, sending the S&P 500 reeling.
S&P 500 annual returns during the Internet boom and bust:
- 1995: 34.1%
- 1996: 20.3%
- 1997: 31%
- 1998: 26.7%
- 1999: 19.5%
- 2000: -10.1%
- 2001: -13%
- 2002: -23.4%
As a Wall Street professional who made and lost a lot of money during that time, I can confirm it truly was the best and worst of times.
There’s a good argument that we’re not nearly as bubble-like today as in 1999, given most top performers are real companies with real profits and while valuation measures are extended, they’re not nearly as sky high as they were before the music stopped in 2020.
Still, investors should remember that stocks zig and zag, taking a circuitous route higher over time, rather than traveling in a straight line forever. There were some significant drops along during the bubble forming, including an 11% drop in 1997, 19% drop in 1998, and 12% drop in 1999.
“They [investors] tend to think about the good things that can go right, and they diminish the things you should be skeptical about that can go wrong,” said Solomon.
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