Learnings from Earnings
A Look Back at 1Q 2025 Earnings
Aggregate S&P 500 earnings per share (EPS) grew 12% year-on-year in 1Q, beating consensus estimates of 6% growth. The 6% positive earnings surprise was primarily driven by profit margins, which reached the highest level since 2Q 2022. The median S&P 500 constituent also posted better-than-expected 1Q EPS growth (6% vs 3% expected). Even with strong performance, an unusually high number of companies are holding firm on their full-year 2025 projections. Many companies did so while excluding the potential effects of tariffs.1 1Q earnings for the Magnificent 7 stood out again, with +32% year-on-year earnings growth vs. 8% for the S&P 493. Consensus expects the difference between Magnificent 7 and S&P 493 EPS growth to converge again. The Magnificent 7 are also expected to drive S&P 500 capex again in 2025.
We have observed how elevated uncertainty has followed the post-election/pre-inauguration excitement and animal spirits of consumers and corporates alike. Corporates we engaged with (consumer and capital spending focused) earlier in the year already flagged a discernable deceleration in business and noted that they were not certain of the levels of true demand. 1Q earnings season ultimately revealed widespread concern over potential tariff effects, leading companies across multiple sectors to adopt conservative financial guidance for the second half of 2025.
Tariffs were top of mind. Nearly 90% percent of companies mentioned “tariffs” on their earnings calls.2
The Two-Speed Consumer: An Ongoing Tale of Resilience and Weakness
Overall, the US consumer remains solid. Major players like Visa, Mastercard, and PayPal highlighted healthy spending and stable consumer behavior,3 with some pull-forward activity from tariff impacts in select categories, such as iPhones. Consumers, however, are growing increasingly anxious with respect to tariff impacts on their cost of living, even if it is not showing up on the shelves yet. We think we will start seeing the inflationary impact from July after the digestion of cheap, front-loaded inventories run their course.
The continued bifurcation of consumer behavior, which we have been highlighting for the past several quarters, points to an ongoing divergence in spending patterns and economic experiences between different consumer segments in the US. While e-commerce giants and online marketplace platforms such as Amazon, Instacart, and Walmart4 continue to see solid demand, some big-ticket discretionary categories are seeing pressures.
The luxury consumer stayed resilient in 1Q. United Airlines, for example, noted that they have "seen no deterioration in the high-end consumer’s willingness to purchase a premium experience”.5 This aligns with findings in the REIT sector, where luxury resorts are performing better. American Express also highlighted continued solid growth across its affluent US consumer base.6 Several European luxury brands, such as Richmont and Hermes,7 are seeing continued demand from European and US customer clusters. This segment seems less impacted by immediate economic uncertainties, though companies remain cautious about potential wealth effects if financial markets decline. The anticipated rebound of the "aspirational" consumer hasn't materialized.
Conversely, the lower-end consumer is facing significant challenges. Most airlines pulled guidance as the trends of lower-end consumer and main cabin leisure weakness continued, partially offset by more resilience in premium cabin from higher-end consumers.
Consumer discretionary spending is currently outpacing staples as consumers deplete pantry items and allocate funds to discretionary goods in anticipation of future price increases—a trend we expect to reverse. Fast casual restaurant growth is decelerating after a strong 2024. Weaknesses in the quick service restaurant space, initially concentrated in the low-income segment, are now impacting middle-income groups. As Domino's Pizza management noted, "consumer sentiment is as low as it was in 2022”.8 Wingstop mentioned that in their experience, consumer sentiment had dropped to its second lowest level since 1952, even breaching pandemic levels, in some regions.9 McDonald's cited weakness in demand, with traffic declining for both low-income and middle-income consumers.10 Walmart continues to see customers prioritize value, speed of delivery, and seasonal events.11
Experience-based spending is generally strong, with affordable entertainment (concerts, subscriptions) holding steady. Travel, particularly theme parks and cruises, has been resilient. In-bound US travel is weak and domestic leisure travel exhibits shorter booking windows and stays, although theme parks and cruises have been resilient.
Navigating Potential Tariff Impacts: A Corporate Perspective
Tariff impacts vary across sectors. While the consumer discretionary sector is experiencing weakness, as noted by Block and Etsy, sectors like healthcare appear more resilient. Several medical device companies maintained or raised guidance. Pharma companies also maintained guidance, with many announcing new capex investments to expand US manufacturing as a negotiation tool for potential pharma sector tariffs. Examples include J&J, Eli Lilly, and Merk.12 Tariffs and recent funding pressures have created a larger headwind on life science tools companies.
If tariffs are levied on auto suppliers, they anticipate passing higher costs to auto OEMs. Adjustments to capex is another mitigating strategy. Tesla announced plans to reduce its capex by 10%, citing that most of their equipment is sourced from China, and alternative equipment from the US was unavailable. Because of the lowered capex spend, we believe the ramp-up of the company’s new vehicle is likely going to be slower than it had planned for.
Among consumer product companies, Procter & Gamble and Colgate have both quantified a potential tariff impact as approximately 3% of their cost of goods sold and noted that they can manage this through a combination of productivity improvements and strategic pricing adjustments.13 Amazon reported $850 million of one-time costs related to the pull-forward of inventory receipts for its 1Q business.14 We have seen some companies proactively “advertise” the opportunity to pre-buy ahead of tariffs. Also notable, Floor & Décor noted that, following the announcement of the 90-day pause on reciprocal tariffs (excluding China), it expedited purchase orders to receive goods before the July 9 deadline.15
Luxury goods companies expressed confidence that they can offset the direct impact from US import tariffs through price adjustments. For example, Hermes planned to raise prices across its entire product range in the US starting in May.16 Brunello Cucinelli echoed similar sentiment, planning to increase US prices in the second half of 2025.17 While none of the soft luxury goods companies have so far observed any significant changes in demand trends for the US customer cluster, commentary on the outlook for 2025 has notably turned more cautious. For example, Hermes highlighted that there might be a time lag, and indirect impacts on the demand of the US luxury clientele may still emerge over the next quarters, particularly if geopolitical uncertainty prevails or financial markets further decline (and thus, the wealth effect turns more negative).18
EcoLab announced that it is implementing a 5% trade surcharge on all solutions and services in the US, on the back of rising raw material prices due to the shift in tariff policy.19 Supply chain adjustments is another mitigation strategy. Companies like Danaher are implementing "China for China" manufacturing, producing goods within China for the Chinese market to avoid tariffs.20 General Motors is a prominent example of a company that has announced plans to reshore its manufacturing activities in response to impending higher tariffs.21 The company guided its full-year expectations lower by approximately 25% due to the tariffs. We have also seen a few labor force reduction actions by tariff-affected businesses, but only moderately so far.
Technology: AI and Data Center Capex Holds Up
Investment in AI and cloud computing remains robust. META has increased its capital expenditure (capex) guidance by approximately $5 billion, bringing the new range to $65-$72 billion.22 This increase signals continued significant investment in AI infrastructure. META indicated that this increased investment is driven by substantial internal demand for GPU-based compute resources. META's guidance for the next quarter also came in at the higher end of expectations, reinforcing the positive outlook.
The cloud computing sector continues to exhibit healthy growth. Microsoft specifically cited faster-than-expected workload migration to its cloud platform, Azure, as a key driver. Microsoft also noted that demand for AI services is growing more rapidly than anticipated even compared to the previous quarter. As a result, the company now expects demand to exceed supply as it exits 2Q 2025, a shift from earlier projections of achieving a supply-demand balance. Microsoft has reaffirmed its existing capex targets and noted that its "capex mix should move towards chips rather than land and buildings."23
The expansion of data centers remains a critical area of growth, particularly benefiting companies involved in AI and semiconductor technologies. Electrical equipment and distribution companies are experiencing positive effects too. For example, Trane Technologies noted that its Americas commercial heating, ventilation, and air conditioning orders hit a new record.24 Equinix, which specializes in internet connectivity and colocation centers, raised guidance due to strong pricing, and noted accelerating AI inference demand.25
Strong “beats” from Siemens Energy and GE Vernova are consistent with our expectations for the power needs of AI.26 The strong results from both companies confirm that gas as an energy source is on the rise. High voltage grid equipment continues to enjoy healthy growth rates for longer, as well as strong pricing power in both segments.
In semiconductors, KLA, a key supplier of process control and yield management systems for the semiconductor industry, sees "very encouraging signs across all aspects of the business."27 They note that AI customers are still ramping up capacity, "but building for less than the stated demand, through 2030." This suggests sustained, but potentially constrained growth in semiconductor manufacturing equipment.
Nvidia, one of the main beneficiaries of the AI boom in our view, reported revenue numbers which were nearly 70% higher than a year earlier, and more than the market expected. It managed to redirect some of the chips destined for China as US policy-dictated curbs on sales to that country took effect. Furthermore, sales of the next generation Blackwell AI chips are also expanding faster than anticipated.28
While there are no broad-based headwinds impacting overall technology spending, some softness is evident in discretionary spending categories. SAP and IBM have both noted slightly weaker transactional revenue in areas such as business travel, leading to fewer Concur transactions for SAP, and lower consumption within Red Hat for IBM.29 Consulting firms including Cognizant are seeing "incremental deal scrutiny", indicating emerging headwinds in discretionary projects.30 This was corroborated by Manhattan Associates, Inc., a software provider for supply chain management, which observed deferrals in consulting projects.31
On the other hand, longer-duration transformational projects, such as migrating enterprise resource planning (ERP) systems to the cloud or implementing advanced supply chain planning solutions, remain largely unaffected. These projects are typically already underway with budgets allocated and approvals secured.
AI-related small cap names have mostly seen positive earnings, driven by continued data center investment and leading-edge logic and memory demand. On the software side, in particular, most companies posted strong quarterly revenue with margins coming ahead of estimates.
Overall, the technology landscape is being re-shaped by AI, concerns about power availability, and the ongoing trade war. While AI investments remain robust, companies are becoming more cautious about discretionary spending and closely monitoring the impact of tariffs on their supply chains and bottom lines. The coming months will be crucial in determining whether these trends intensify or whether a resolution to the trade war can ease the uncertainty.
Looking Ahead
The full impact of tariffs is yet to be felt, as many companies initially relied on existing inventory, delaying the need to raise prices and thus potentially obscuring true elasticity impacts. Pre-emptive buying in anticipation of price increases has also temporarily masked the effects. We believe the future will reveal which companies have successfully managed to navigate this challenging environment, determined by strategic management decisions regarding logistics, inventory (balancing sufficient stock and avoiding overstocking), and pricing strategies (whether to protect margins or gain market share). Productivity improvements will also play a key role in offsetting tariff costs. Most companies are yet to make meaningful price adjustments, suggesting that the current market recovery may be overly optimistic. As fundamental investors, we will need to carefully analyze how companies outline and delineate their tariff impact on their business, as well as consider how varying accounting methodologies will affect income statements, balance sheets, and cash flows. With regard to the state of the consumer, we note that at recent luxury goods conferences, the messaging was quite cautious regarding 2Q trends, mainly driven by a slowdown in the US with still soft Chinese luxury demand. As a result, we may not see sequential improvement in organic sales. This is another space that we are watching closely going into the second half of this year.
Turning the Spotlight Back on the US
As part of our 1Q 2025 Learnings from Earnings, we sat down with Brook Dane and Rob Crystal, portfolio managers for US large cap and US small- and mid-cap equity strategies respectively, to discuss trends in US technology—a sector where large caps have led this quarter’s results again, and where 77% of small cap companies have beat consensus’ EPS expectations.32
Q1. The technology sector, notably mega-caps, have demonstrated strong earnings results once again. Is this validation of US pre-eminence? And what trends stood out across the sector?
Indeed, it was another strong quarter for corporate America. This supports our view that while the US market concentration remains high and geographical diversification is important, investors should be wary of “throwing the baby out with the bathwater”. We believe the US remains a high-quality area to invest in over the long-term, with sustained R&D investment underwriting a solid foundation for economic strength. It remains a cradle of innovation, an undisputed leader in so-called unicorns (start-ups valued over $1 billion) with 729 in 2024 vs China with 313, and 48 in the UK.33 The US market remains the listing of choice for many global companies. Foreign investment into the US does not show signs of abatement. Even if not all recent announcements from the Middle East and Japan and various corporates around the world materialize in full, we should still see a significant uplift, an estimated $30-135 billion.34And the next focus of the Trump administration, which is tax and regulatory reform, should provide a boost to the smaller cap part of the market.
A few things stood out in 1Q 2025: cloud services are still in demand, advertising spending held up better than expected, and software is doing really well. Cloud companies’ capex defied concerns about a potential slowdown and not only remained strong but accelerated. This indicates continued investment in infrastructure to support growing demand for cloud-based services and AI-related initiatives. Advertising revenue also proved surprisingly resilient, despite potential headwinds from emerging e-commerce platforms. The software sector exhibited notable strength, with many companies surpassing forecasts and maintaining positive outlooks for the remainder of the year. Consumption-based software models—companies like Snowflake and Datadog, which charge based on usage—saw strong demand. We're also seeing evidence that "agentic AI" is scaling effectively. Semiconductor companies generally reported positive earnings, signaling a recovery from a period of inventory correction. Companies like Texas Instruments and Microchip Technology reported "beat and raise" results, suggesting the trends are bottoming out. Furthermore, potential shifts in AI diffusion rules, including possible negotiations with key international partners, could create new opportunities for companies in the AI and semiconductor industries.
Q2. Do these trends also apply to the small cap space?
We see these trends permeating the small caps universe, and they can absolutely be played here. In fact, it’s where tech innovation has always begun. Perhaps less so in AI infrastructure, although even here we find some interesting business models. But there is definitely a good choice of AI components, especially on the software side. Agentic AI is also playing a role in small cap space.
Smaller tech companies present some interesting opportunities. For example, a cloud computing platform that provides infrastructure and platform tools for developers, startups, and small to medium-sized enterprises (SMEs) stands out. Its customers are smaller and may not be sophisticated enough in terms of AI to build and manage everything themselves, even if they have GPUs. Catering customers with varying degrees of expertise with Gen AI, the company's platform simplifies cloud computing, making it more accessible and scalable.
We are also excited about device manufacturers and capital equipment players in the semiconductor industry, which we believe are the backbone of so much innovation. We're also keeping a close eye on companies that are enabling small businesses through agentic applications—smart tools that help them get things done more efficiently, especially geared to the CFO office. There are interesting players developing AI powered platforms that help SMEs with financial close and consolidation, planning, reporting, and analytics. We are also looking at how AI tools can help banks tackle compliance and regulatory tasks.
Q3. How are investors thinking through tariffs and AI capex trends?
Firstly, tariffs and related market reaction is of course something that investors are focused on. Increased tariffs may raise costs for companies, impacting margins where demand is elastic, and substitutes are readily available. However, companies with differentiated products and strong competitive moats will likely maintain margins by passing on costs. Many companies have been through these policy changes before and adjusted their business models during the first Trump administration as well as price increases during 2022-2023. And, with their largely domestic orientation, small cap companies may not be as concerned about shifting their production among countries.
Secondly, the whole AI spending story has been a rollercoaster this year. First, DeepSeek created an upheaval, then there were reports that Microsoft was backing out of some data center lease options, which made some investors wonder if the AI spending would slow down. In the face of market concerns about spending slowing, during the most recent earnings calls, major companies announced even more AI capex. For example, META has increased its capex guidance by approximately $5 billion, bringing the new range to $65-$72 billion.35 Since the start of this year, over $300 billon in AI capex has been announced, up 7.5% year-to-date compared to 2024,36 which has boosted investor confidence.
AI infrastructure investments and the unrelenting growth of data centers is going to benefit many players in the broader AI ecosystem in our view. In the small cap space, we see interesting opportunities among companies that are creating cutting-edge cooling and climate control solutions for data centers and semiconductor plants. As AI-driven data centers expand, evaporative cooling towers are critical for maintaining ideal operating temperatures to prevent equipment damage and optimize performance.
Q4. Apart from continued AI related capex, what other trends are you seeing?
As we anticipated at the start of the year, we're now seeing tangible proof points that validate the accelerating development within the data space. It's becoming evident that data cleansing and management will be the crucial determinant of success in the next phase of AI evolution and adoption.
Microsoft posted a strong quarter, with Azure Cloud Services accelerating to 35% versus the ~31% expectation, with forward guidance meaningfully above expectations. The company now expects demand to exceed supply in the June quarter, which is more optimistic than its previous view. Significantly, during their earnings call, Microsoft’s management highlighted the increasing trend of data growth and modernization driven by AI workloads.
Data management is experiencing tailwinds as enterprises prioritize getting their data assets in order. Snowflake, with its consumption-based revenue model, reported better-than-expected results, giving us near real-time insights into this acceleration. Data security companies are also starting to see the impact. Companies such as Datadog and Varonis, which specialize in data monitoring, cleansing, and protection, have reported strong revenue growth.
Finally, we're observing improving fundamentals in the memory space. Key players such as Hynix, Micron, and Samsung are increasing their capex to support capacity growth for new memory applications. They had been spending near trough levels for the past two years as memory fundamentals were weak, and supply/demand was imbalanced; this trend is now positive.
Q5 What tech trends are you currently most excited about?
Agentic AI! This is a type of AI that focuses on systems capable of acting autonomously, making decisions, and achieving goals with minimal human intervention. These “AI agents” can learn, adapt, and collaborate with humans to solve complex problems. It’s the next big wave, where applications are going to take the lead on basic research and processing tasks. We are already seeing this in call centers, where AI agents are successfully resolving queries before customers need to talk to human reps for more complex issues. It would allow companies to scale their employee base, increase labor productivity and achieve much higher returns on investment. We believe that incumbent application companies with large installed customer bases will have an advantage. As they develop new applications, they can leverage existing data in their systems to offer more relevant, out of the box functionality. This should speed up adoption and enable the vendors to finetune AI agents and control them efficiently. We expect this to increase their success in cross-selling.
Overall, we are constructive on the outlook for the US market and the technology sector, where we find great businesses to buy at attractive valuations. We continue to believe we are still at the starting point of a major tech cycle.
1 GS Global Investment Research, S&P 500 Beige Book: 3 themes from 1Q 2025 conference calls, May 7, 2025.
2 GS Global Investment Research, Weekly Kickstart, Maintaining our 2025 S&P 500 EPS forecast, May 9 2025.
3 Companies’ earnings calls, April 30, May 1 and April 30, 2025, respectively.
4 Companies’ earnings calls, May 1, May 1, and May 15, 2025, respectively.
5 Company's earnings call, April 16, 2025.
6 American Express’ earnings call, April 17, 2025.
7 Richemont's annual results presentation, May 16, 2025; Hermes’ earnings call, April 17, 2025.
8 Domino Pizza's earnings call, April 28, 2025.
9 Wingstop earnings call, May 1, 2025.
10 McDonald's earnings call, May 1, 2025.
11 Walmart's earnings call, May 15, 2025.
12 Companies’ earnings calls, April 15, May 1, and April 24, 2025, respectively.
13 Companies’ earnings calls, April 24 and April 25, 2025, respectively.
14 Amazon's earnings call, May 1, 2025.
15 Floor & Decor's earnings call, May 1, 2025.
16 Hermes’ earnings call, April 17, 2025.
17 Brunello Cucinelli's earnings call, April 16, 2025.
18 Hermes’ earnings call, April 17, 2025.
19 EcoLab's earnings call, April 29, 2025.
20 Danaher's earnings call, April 22, 2025.
21 General Motors’ earnings call, May 1, 2025.
22 Meta 1Q 2025 earnings call, April 30, 2025.
23 Microsoft's earnings call, April 30, 2025.
24 Trane Technologies’ earnings call, April 30, 2025.
25 Equinix’ earnings call, April 30, 2025.
26 Companies’ earnings releases, May 8 and April 23, respectively.
27 KLA Corporation's earnings call, April 30, 2025.
28 Nvidia's earnings release, May 28, 2025.
29 Companies’ earnings releases, both on April 23, 2025.
30 Cognizant's earnings call, April 30, 2025.
31 Manhattan Associates’ earnings call, April 22, 2025.
32 Furey Research Partners, 1Q25 Small Cap Earnings Show Modest Improvement, as of May 13, 2025.
33 PitchBook Unicorn Tracker. PitchBook defines a unicorn as a venture-backed company that raised a round at post-money valuation of $1 billion or more. Data as of 02-Dec-2024.
34 GS Global Investment Research, Global Economics Comment: Tracking Inbound US Investment Announcements, May 16, 2025.
35 Meta 1Q 2025 earnings call, April 30, 2025
36 Goldman Sachs Asset Management, CNBC, Bloomberg, Apple, TSMC, as of April 2025
