Glimmer of Growth

Revenue growth for firms has been a nagging problem for some time. But according to the latest fourth-quarter results, it’s hardly a problem on the profit side.

With about two-thirds of the S&P 500 companies reporting their quarterly earnings, profits per share are up a significant 16.4% from a year ago, according to market-data-analysis firm FactSet. In particular, these big firms, as a group, have had their best end-of-year performance in three years. Wall Street thinks the good times should continue, too. According to FactSet, analysts are predicting 13% growth in S&P 500 profits in 2025.

But for some experts, it’s not the gaudy gain itself, but where the gains are coming from that could be a worry. Most of the profit growth is coming not from selling more products to new or existing customers, they say, but from either financial engineering—such as buying back stock—or cost cutting. “Companies are dancing in the same places and elbowing one another. It’s pretty crowded,” says Alina Polonskaia, a senior client partner with Korn Ferry’s CEO Succession and Enterprise Leadership practice. Indeed, revenue growth for the companies that have reported results so far has been 5.2%. Even with that, more than half of that gain was eaten up by the rising prices companies paid to produce goods.

To be sure, it’s part of almost every CEO’s mandate to keep costs in check. Many firms are currently in the midst of trimming the number of management layers they have. Plus, shareholders want many of the big companies in which they invest to pay them back, whether those firms buy back shares (which can increase the value of the remaining outstanding shares) or pay dividends.

Still, firms continue to face some headwinds on the revenue-growth side. The US economy isn’t expected to grow much more than 2% to 3% in 2025. Consumer sentiment, often a indicator of future sales, is declining while inflation expectations are rising. Worldwide, many other major economies are plodding along. Mergers, often a strategy CEOs employ to jump-start growth, could be losing their spark. ”Larger firms are finding that there’s only so much profitable growth they can squeeze out of mergers and acquisitions,” says Dave Rossi, president of Korn Ferry’s Global Industrial Market practice. 

In general, experts believe that firms have to grow their businesses to be successful over the long haul, not just rely on cost cutting or share buybacks. Expanding more into developing countries or going beyond servicing its most profitable customers could be helpful. “Executives need to reach out to the overlooked customer bases,” Polonskaia says. But the biggest key to future growth, many experts believe, will come from innovation: operational improvements that make products faster, better, or cheaper, or new devices that save consumers time and money.

That innovation could also come from investing in talent. Of the firms named on the 2024 Korn Ferry’s World’s Most Admired Companies list, eight in 10 said that growth depends less on investment in technology and more on people—hiring the right ones, aligning them properly in the right teams, and offering a skills- and career-development program.

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