Learnings from Earnings

A Look Back at 2Q 2025 Earnings

While US corporates generally exceeded expectations in the 2Q earnings season, market reactions were highly asymmetric, with companies that missed estimates experiencing harsh sell-offs. Over 80% of S&P500 companies beat earnings-per-share (EPS) estimates, with EPS growth roughly double what the market had expected going into the reporting period. The “beats” were accompanied by guidance momentum: nearly 60% of companies providing full-year guidance raised it. The Magnificent continued to drive a disproportionate share of growth, recording 26.6% year-over-year earnings growth versus 4% for the rest of the index, though performance within the cohort was highly dispersed. Small-cap earnings were also better than expected and top-line growth strengthened. While year-on-year growth in the Russell 2000 earnings for 1Q and 2Q may still be below prior-cycle averages, consensus expectations indicated a positive inflection in the second half of the year.¹

Key themes emerging from the quarter included a nuanced impact of tariffs, the pervasive influence of AI on capital expenditure, and a surprising resilience in consumer demand.

Beyond Absorption: How Are Companies Managing Tariffs and What's Next for Consumer Prices?

In 2Q, tariffs transitioned from a background risk to a quantifiable line item, yet companies largely managed their impact. Businesses absorbed initial costs, reworked sourcing, pricing, and operations, and signaled a steadier and more selective pass-through into 3Q and 4Q. A notable surprise was the absence of guidance cuts in tariff-exposed sectors. Furthermore, in our post-earnings discussions with management teams, tariffs were, somewhat unexpectedly, not a primary topic of concern.

Retail offered the clearest playbook: protect value first, reprice surgically later. Large retailers like Walmart, TJX, and Home Depot focused on market share rather than deterring customers through price hikes, leveraging their scale to negotiate with suppliers. Walmart is "playing offense" by committing to "keeping prices as low as possible",² while noting weekly cost increases as it replenished post-tariff inventory. This was echoed by TJX which expects gradual,³ stepped price increases.

Many consumer products companies, such as Amazon, eBay, and Sprouts, reported muted or modest impact from tariffs so far. We note that retailers such as Target are working to mitigate tariff impacts by diversifying production countries and evolving assortments. More recently, however, effects of tariffs are beginning to show up in stores through less discounting and we have seen some price increases in July and August. We expect more retailers to raise prices in 3Q and 4Q, which will likely amplify the need for value. 

In healthcare, medical device companies reported a smaller-than-expected tariff impact, contributing to margin expansion. Pharmaceutical companies largely stated that tariff impacts were manageable or already factored into their guidance, though customer decision-making in the tools sector was slowed by tariff uncertainties.

In the technology hardware sector, Apple,⁴ for instance, announced an additional $100 billion investment in the US, on top of its prior announcement of $500 billion, which notably led to its exemption from certain tariffs. In semiconductors, KLA expected tariffs to be a 100-basis point headwind on its gross margins.⁵ Texas Instruments,⁶ for the first time, called out tariff pull-ins, particularly in the China industrial space. Japanese industrial robot manufacturers like Fanuc noted that tariff uncertainty led automobile clients to refrain from new capital expenditure,⁷ though they anticipate stronger demand post-negotiations.

Our analysis shows that most industries, excluding auto, managed to offset 50-75% of tariff-related cost headwinds through pricing or production shifts.⁸ Automotives, however, bore the brunt of the impacts: Ford⁹ guided to a $2 billion headwind and Rivian noted that tariffs had increased total vehicle costs by “a couple thousand dollars per unit".¹⁰

Across sectors, management teams’ adjustment tactics converged on localized manufacturing where feasible, supply‑chain diversification, granular and nuanced pricing, tighter inventory discipline, and cost‑out programs, to quantify, mitigate, and phase in tariff costs that companies no longer treat as temporary. The through-line from 2Q into the back half of the year is that early absorption bought time to rewire sourcing and pricing; operational execution helped preserve margins and value; and clearer tariff-rate visibility now supports a measured, demand‑sensitive pass‑through that avoids abrupt price shocks while maintaining price leadership and competitive positioning.

In Europe, tariffs, alongside unfavorable FX rates, were a significant drag on earnings, particularly for export-oriented companies.

The Split Consumer: Discretionary Weakness Meets Premium Resilience

This earnings season reinforced a familiar pattern: overall consumer spending remains resilient, but results showed a widening gap between affluent households who continue to spend freely and lower-income consumers who are increasingly constrained. Company reports across retail, restaurants, payments and travel underline the divergence.

Mastercard¹¹ and Visa¹² noted that the US consumer remained generally healthy, supported by wage growth and strong spending from high-income segments. This resilience was further echoed by retailers like eBay,¹³ Etsy,¹⁴ and Sprouts,¹⁵ which noted stable-to-improving consumer demand. Retailers such as Best Buy¹⁶ and Dollar General¹⁷ cited sequential improvement in July with momentum continuing into August on back-to-school events. But discretionary categories remain under pressure at the lower income end of the spectrum. Quick-service restaurants reported that lower-income customers are visiting less often unless offered promotions. McDonald’s highlighted that its return to positive US same-store sales in Q2 was driven by a new round of value deals,¹⁸ as management acknowledged persistent pressure on budget-conscious diners. Walmart observed that middle- and lower-income consumers are more affected by higher prices and are adjusting purchasing behavior more significantly than higher-income households,¹⁹ although even the latter were seeking out value. TJX attributed the "balance across all the different income demographics" to their value positioning and marketing campaigns.²⁰

Our analysts note that retail giants like Costco, Walmart, and TJX printed the best top-line results when compared to their direct peers, demonstrating their ability to capture consumer spending effectively. Full-year guidance was largely reaffirmed and, in some instances, like with TJX,²¹ and Walmart,²² even improved.

In the travel sector, Delta Airlines mentioned that the high-end consumer remains healthy while weakness persists at the low-end,²³ evidenced by continued outgrowth of premium cabin compared to main cabin. These results mirror broader commentary from airlines and leisure companies that high-end travel and experiences remain robust even as lower-fare leisure demands shorter booking window and weaker volume. However, we have observed weakness in the hotel segment, stemming from corporate, international inbound, and government travel segments. Europe and the Middle East exhibit healthy travel trends.

Among more affluent households, spending momentum remains intact. Demand from high-income consumers for both soft and hard luxury has held strong in 2Q. For instance, Brunello Cucinelli,²⁴ which sells high-end soft luxury goods, started off the earnings season with 2Q organic sales growth of +11%, in line with expectations and sequentially unchanged compared to the start of the year.  

Navigating the AI Wave: 2Q 2025 Tech Sector Performance and Strategic Implications

The Magnificent-7 delivered robust performance once again, dramatically outpacing the broader S&P's earnings growth. Major hyperscalers’ capex guidance has been significantly revised upwards, indicating a multi-year investment trend rather than a temporary phenomenon. The 2026 capex for the top four (Microsoft, META, Amazon and Google) now stands at roughly $430 billion vs $370 billion prior to the 2Q prints.

This substantial capex is beginning to affect hyperscalers’ free cash flow (FCF) generation and margins. Despite this impact on FCF, investors responded positively to the increased capex guidance during the earnings season, and the stocks of these companies performed well around the announcements. This investment wave is reshaping capital spending patterns, and setting the stage for long-term structural shifts in infrastructure and industry.

AI supply chain dynamics have become central to many management discussions. The semiconductor sector reflected AI's pervasive influence, with semi-capital equipment companies like KLA Corporation and Lam Research reporting strong quarters. TSMC also delivered strong beat-and-raise results driven by AI-related demand and raised its CY2025 revenue guidance. ASML, on the other hand, had a mixed quarter and the management’s tone in forward-looking statements was very cautious. We see ASML’s weak guidance for 2026 as specific to adoption challenges that the company faces and not a broader indicator for the semi-cap industry. Nvidia reported yet another strong quarter; however, over the past few quarters, the size of the beat has continued to get smaller. Ultimately, all eyes were on the 3Q revenue guidance which came in at $54 billion, slightly below consensus expectations of $55 billion. In the technology hardware sector, AI demand was a significant driver, with Arista Networks revising its 2025 revenue growth rate upward, citing Meta and Microsoft as key customers. Storage companies like Western Digital benefited from clear visibility of storage demand from hyperscale customers.

Advantest, a leading Japanese company that specializes in providing testing and measurement solutions for the semiconductor industry, reported record tester sales, up nearly three times year-over-year. This massive increase was primarily driven by Nvidia's urgent need for these testers to build their powerful Blackwell chips. Essentially, as Nvidia ramped up production of its cutting-edge chips, Advantest's testing equipment became an indispensable part of that process, leading to their record-breaking sales.

Recently, improvements in AI models’ capabilities have been relatively small, with the cost of model training rising. Some “AI-native” companies such as Replit, Cursor, and Anthropic shifted their pricing from flat monthly fees to consumption-based or hybrid models. Other software companies, such as Atlassian, ServiceNow, and HubSpot, are also moving toward this pay-as-you-go approach, especially as more people start using AI features. However, these companies are still figuring out the best ways to make money from these new tools.

The AI-related stock market showed a clear split: companies seen as leaders, such as hyperscalers, infrastructure, and security software vendors, performed much better than companies focused on business software and IT services. For example, changes in Google’s search features affected how smaller software companies attract new customers through their websites. In IT services, businesses like IBM found that using new AI tools made their work more efficient, but it also meant clients were asking for lower prices on routine maintenance services. Despite these changes, companies like Workday, ADP, and Paychex reported more employees in their systems compared to last year, suggesting that AI hasn’t led to job cuts—at least for now. More software firms, including ServiceNow, Salesforce, and Microsoft, are now sending teams to help their customers quickly put AI solutions to work.

Looking Ahead

The key question is whether the consumer is getting squeezed. Following post-tariff inventory reshuffling, we anticipate a broader range of companies—spanning retail, consumer products, and specific industrial sectors—will implement targeted price increases. Signs of demand elasticity, such as trading down or reduced basket sizes, will be crucial indicators. We will also keenly monitor margin performance across sectors as companies manage input cost pressures. The 3Q 2025 earnings season will test the resilience of strategies put in place over the past several quarters. Margin preservation through pricing, productivity gains, or operational efficiency, will be a key differentiator.

Spotlight on Healthcare

As part of our 2Q 2025 Learnings from Earnings, we sat down with Jenny Chang, a co-portfolio manager for US large and mid cap equity and co-lead portfolio manager for Global Future Healthcare Fund and Growth Opportunities Fund, to discuss trends in US healthcare.

Q1. How has the healthcare sector performed relative to the broader market in recent years, and what opportunities do you see arising from its current valuations and the fading of policy-related uncertainties?

The healthcare sector has notably underperformed the broader market over the past three years, driving its valuations to near historic lows. Its current weighting in the S&P 500 is approximately 9%, a level not seen since 1994, and its relative forward price-to-earnings ratio is near the 2nd percentile of its long-term history. This underperformance presents a significant opportunity, especially as many policy uncertainties, such as drug price reforms and tariff concerns, appear to be priced in and are fading. The sector exhibits positive momentum with double-digit revenue growth, second only to IT, particularly in Medtech, which has shown robust results and raised guidance. Innovation continues to flourish, transforming diagnostics, treatments, robotic surgery, automated insulin delivery, obesity medicine, and rare disease cures. The conversation is expected to shift back to healthcare's inherent ability to innovate and its strong potential for sustainable long-term growth.

Q2. What recent breakthroughs and promising innovations in the healthcare sector, particularly among small- and mid-cap biotech companies, are capturing investor interest and opening new avenues for treating challenging diseases?

Small- and mid-cap biotech companies remain a fertile ground for groundbreaking innovations, offering significant upside for discerning investors. Recent advancements include the first-ever approved medicine for Metabolic Dysfunction-Associated Steatohepatitis (MASH) in the US and Europe, which reduces liver inflammation and scarring by addressing underlying metabolic problems. In respiratory medicine, a biotech firm successfully advanced a previously discontinued drug for bronchiectasis, calming lung inflammation, reducing flare-ups, and improving patient quality of life while lowering hospital costs. Additionally, a new treatment for a genetic bone disorder shows promising early clinical data, demonstrating substantial reductions in fracture rates and improved bone strength. These companies are attractive due to their solid commercial base, exciting new product launches driving growth, and further pipeline potential.

Q3. What factors are driving the rapid expansion and innovation in the GLP-1 anti-obesity drug market, and how might new therapies—such as monthly injections and oral medications—reshape the future of obesity treatment and its impact on global healthcare costs?

The anti-obesity drug market is rapidly expanding, driven by the global challenge of over a billion people affected by obesity, including approximately 100 million in the US. This market could be worth between $100 and $150 billion by 2030, with each million prescriptions representing a $5 billion opportunity. GLP-1s and similar treatments aim to reduce the estimated $170 billion in annual US healthcare costs attributed to obesity, with a wider impact exceeding $1 trillion. Currently, two major pharmaceutical companies lead the market, benefiting from first-mover advantages, unparalleled reimbursement access, and strong product pipelines. Innovation is focused on developing more convenient oral medications and next-generation injectables. Smaller, innovative companies are also contributing, with one biotech firm developing a monthly injection and working on longer-lasting injectables and oral medications, which could significantly broaden access to weight loss treatments. The market's growth suggests ample room for more than two major players, especially as new therapies come to the table and patient needs keep evolving.

Q4. What are some of the most exciting breakthroughs outside of biotech and biopharma sectors that could transform how we treat and manage diseases in the coming years?

Beyond biotech and biopharma, significant breakthroughs are occurring in the medical devices sector, particularly in minimally invasive technology, which leads to better patient outcomes and lower healthcare costs. Examples include:

• Next-generation insulin pumps: Smart, tubeless patches that automatically deliver insulin by communicating with continuous glucose monitors (CGMs), essentially acting as an "artificial pancreas."
• Continuous glucose monitors: (CGMs): Tiny, discreet body sensors that continuously monitor blood sugar, eliminating the need for routine finger pricks, lasting longer, and delivering real-time data to smartphones for improved diabetes management.
• Robotic-assisted surgery: Advanced systems provide surgeons with high-definition 3D views and unmatched precision. Future systems promise enhanced force feedback, augmented reality, more sophisticated instruments, faster setup times, and AI integration for real-time guidance.

These innovations result in faster, less invasive procedures, better patient outcomes, and greater efficiencies for providers. Additionally, emerging AI in healthcare is promising; a cloud software and data provider for pharma intends to incorporate agentic AI to reduce clinical trial costs by up to 30% by 2030, addressing the current lengthy and expensive drug development process. This automation is expected to drive demand for their cloud software products.

Q5. Capital markets’ dynamics in the healthcare sector seem to have gathered momentum, which is particularly positive for the small cap end of the market.

Capital markets in the healthcare sector are gaining momentum, especially benefiting small-cap companies, with M&A activity picking up and expected to continue. This trend is driven by reset biotech valuations and big pharma's urgent need to offset hundreds of billions in revenue loss from upcoming patent expirations by acquiring new, highly efficacious, and safe therapies. Strategic M&A is bifurcated: targeting companies with innovative drugs close to market for late-stage acquisitions to leverage commercial strengths and replace lost revenue, and acquiring early-stage companies working on novel science to access fresh development candidates for long-term pipelines. This dual approach addresses both short-term revenue replacement and long-term pipeline needs. Buying into innovation early can be a more efficient way to build future growth, given the increasing challenges in funding clinical trials. Pharma is expected to remain active across the risk spectrum, pursuing both mature products ready for commercialization and cutting-edge science that will take years to reach patients.

¹Furey Research, 1Q25 Small Cap Earnings Show Modest Improvement
²Walmart's earnings call, August 21, 2025.
³TJX's earnings call, August 21, 2025.
⁴Apple as of August 2025; https://www.apple.com/newsroom/2025/08/apple-increases-us-commitment-to-600-billion-usd-announces-ambitious-program/
⁵KLAC's earnings call, June 30, 2025.
⁶Texas Instruments's earnings call, July 22, 2025.
⁷Fanuc's earnings call, July 25, 2025.
⁸Goldman Sachs Asset Management. As of August 2025.
⁹Ford's earnings call, July 30, 2025.
¹⁰Rivian's earnings call, August 5, 2025.
¹¹Mastercard's earnings call, July 31, 2025.
¹²Visa's earnings call, July 29, 2025.
¹³eBay's earnings call, July 30, 2025.
¹⁴Etsy's earnings call, July 30, 2025.
¹⁵Sprouts’s earnings call, July 30, 2025.
¹⁶Best Buy's earnings call, August 28, 2025.
¹⁷Dollar General's earnings call, August 1, 2025.
¹⁸McDonald's earnings call, August 6, 2025.
¹⁹Walmart's earnings call, August 21, 2025.
²⁰TJX's earnings call, August 20, 2025.
²¹Fanuc's earnings call, July 25, 2025.
²²Texas Instruments's earnings call, July 22, 2025.
²³Delta Airlines's earnings call, July 10, 2025.
²⁴Brunello Cucinelli's earnings call, August 28, 2025.