The 8.6% year-to-date gain in the S&P 500 during 2025 isn’t the result of a single factor—it’s a combination of moderate earnings improvement and notable multiple expansion. According to the latest data, EPS (Earnings Per Share) growth contributed 3.7%, while P/E multiple expansion accounted for 4.8%. But when breaking down the index by sector, stark divergences appear, offering a clearer picture of what’s truly driving performance—and where risk may be hiding.

The Equation Behind the Index

The basic market math behind the index’s price appreciation is simple:
Price Return = EPS Growth + P/E Multiple Expansion.

This equation allows investors to separate fundamentally driven gains from valuation-driven optimism and identify where growth is based on real performance—or inflated expectations.

Industrials Lead, But It’s All About the Multiple

With a +17.5% price return, the industrial sector is the top-performing group year-to-date. However, the bulk of this gain comes from P/E expansion of 15.3%, while EPS only rose by 2.0%. In short, investors are pricing in strong future growth or government stimulus, despite relatively modest current earnings. This makes the sector potentially vulnerable to shifts in sentiment or macroeconomic data.

Technology: Solid Fundamentals, Cautious Repricing

Tech stocks returned +12.5%, supported by a +7.6% EPS increase and a +4.6% multiple expansion. This combination indicates healthier fundamentals than most sectors, with investors being more measured in their optimism—perhaps due to prior overvaluation or ongoing interest rate sensitivity. Still, this balance between earnings and valuation is a positive sign.

Utilities and Communication Services: Strength on Both Fronts

Both Utilities (+11.5%) and Communication Services (+11.3%) posted solid returns, backed by EPS growth of 5.0% and 8.2% respectively, and modest multiple expansion (6.1% and 2.9%). This dual contribution indicates more sustainable rallies, with both operational performance and market sentiment playing a role.

Financials: Stable Growth and Modest Valuation Upside

The financial sector delivered a +10.5% gain, fueled by +7.4% EPS growth and a +2.9% boost in P/E. This reflects strong earnings, likely due to stable interest rate conditions and credit performance, with a relatively restrained valuation adjustment. Investors seem cautiously optimistic, but fundamentals justify continued strength.

Materials: Earnings Decline Hidden Behind Valuation Surge

The +9.6% return in the materials sector is misleading. EPS actually declined by 2.5%, but a +12.4% multiple expansion more than made up for it. This points to speculative investor behavior, pricing in future recovery that hasn’t materialized in current earnings. This sector may be prone to sharp reversals if macro or commodity trends disappoint.

Real Estate and Consumer Staples: Defensive but Weak

Real Estate rose 4.9%, driven almost entirely by +5.1% P/E expansion, while EPS was flat at –0.2%. Similarly, Consumer Staples gained 4.2%, supported by +4.9% multiple expansion and –0.7% EPS decline. These sectors are behaving defensively, but offer limited earnings support—a red flag in a shifting rate environment.

Energy: Collapsing Earnings, Rising Hopes

Energy stocks are in a contradictory position. Despite a brutal –10.4% EPS collapse, the sector managed a +1.7% return, purely driven by a massive +13.6% increase in P/E. Investors appear to be betting on a turnaround in commodity prices or supply dynamics, but current fundamentals do not justify this optimism.

The Only Negative Sectors: Consumer Discretionary and Health Care

Consumer Discretionary (–0.7%) and Health Care (–1.0%) are the only two sectors in the red. Both experienced declines in EPS and P/E multiples—an indication of fading investor confidence, possibly due to margin pressure, regulatory uncertainty, or changing consumption behavior in a post-pandemic landscape.

What These Divergences Signal

The takeaway is clear: 2025’s equity rally is primarily driven by valuation expansion rather than earnings growth. While many sectors show operational improvement, the market is rewarding stocks based on expectations rather than results. Sectors like Industrials, Energy, and Materials are highly sensitive to sentiment shifts and could underperform if forward-looking narratives break.

Outlook: Fragile Momentum or Justified Optimism?

With P/E multiples doing most of the heavy lifting, the rally is on less stable footing than it appears. If macroeconomic data softens or interest rate expectations shift, sectors with weak earnings and inflated valuations may correct sharply. Conversely, sectors like Technology, Financials, and Communication Services—with more balanced EPS and P/E contributions—may provide more durable upside in the months ahead.