02 Sep 2025
Author | Iain Snedden, Senior Investment Specialist
The vast majority of companies have now reported their second-quarter numbers, and the good news is that things looked pretty solid overall.
After a healthy first quarter earnings season, we identified two key concerns. First, were first-quarter numbers positive because uncertainty only really started to take hold after the quarter ended, with Liberation Day taking place on 2 April? Second, did companies rush to stock up before tariffs kicked in, resulting in a pull forward of demand artificially inflating first-quarter sales? While neither of these hypotheses can be categorically disproved at this stage, second-quarter numbers do provide some reassurance that things continue to tick along nicely for now.
As has been the case for a number of years, the US again delivered the best revenue and earnings growth. To put some statistics behind it, data from Factset shows that 81% of S&P 500 companies delivered EPS ahead of consensus for the second quarter, which is higher than both the 5 and 10 year averages. At 11.8%, EPS growth is on course for its third consecutive quarter of double-digit expansion, which is very good going.
You’ll get no prizes for guessing where most of that growth is coming from. Technology, communication services (think quasi-tech) and financials have all reported the best growth rates. This is AI at work, as the world continues to build out huge amounts of data centre and compute capacity, driving demand for everything from semiconductors to the power management and cooling systems for data centres.
What we’ve found interesting was not just the proportion of beats but the share price reaction to these beats. Companies that beat expectations were rewarded less than usual, with shares gaining by less than half of the five-year average. In contrast, those that missed expectations were heavily punished, with shares down more than twice the five-year average.
S&P 500 stocks' reaction to earnings beats/ misses
Source: Factset, August 2025
What’s the reason for this? Well, one obvious answer is punchy valuations. On almost any metric, US stocks are expensive versus the rest of the world and their own history. Expectations are high, companies are expected to deliver and investors have little tolerance for those that don’t. Whether these valuations are justified would make for another article in its own right.
On the other side of the Atlantic, there has been much euphoria around European equities this year. Look closely though and you’ll see that, in local currency terms, all of the returns came in January and February. Earnings growth on the continent is ok but lags well behind the US. Promises of huge German fiscal expansion, exciting as they are, likely will not feed meaningfully into corporate earnings until next year at the earliest, and other member states are yet to follow suit on a similar scale.
So, what are the main themes in Europe? Currency is a big one. The strength of the Euro has acted as a headwind for many of the bloc’s large international companies which generate a decent proportion of revenue in other currencies.
Another common thread is the struggles faced by stocks across the consumer-related spectrum, from staples firms selling everyday essentials to luxury brands offering handbags worth thousands of Euros. While the business models are very different, the underlying problem is somewhat similar. Both industries put through massive price rises during Covid and the following couple of years; consumer sentiment has since softened, weighing on demand. Volumes are now under pressure and there is little room to push further on price to make up for it – not a good mix.
There are brighter points though. European banks are loving life, particularly those in southern Europe, which have been among the best performing stocks on the continent this year. Earnings growth has been very strong here. Similarly, health care, which has not been without its pressures and threats from tariffs, has defied the noise to deliver robust earnings. And lastly, we all still seem to be determined to go on holiday, judging by the healthy numbers coming out of the likes of Ryanair, Jet2 and IAG (owner of British Airways and Iberia).
It’s been a reassuring earnings season on the whole. Concerns that the Trump effect would result in a sharp shock to US and global earnings are (for now) unrealised. The US continues to deliver the earnings growth that the US exceptionalism thesis demands. Europe grinds on, with some fairly clear winners and losers. More sustained and widespread earnings growth is needed here though if the continent wants to fulfil the promise of closing the valuation gap to the US. Companies have had a lot thrown at them this year and uncertainty remains elevated but for now, they continue to execute well and provide reassurance to investors.
The earnings season provides cautious optimism, but the sustainability of current trends will likely depend on continued execution amid ongoing economic uncertainties.
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