Equity Beat: One Theme to Rule Them All

Equity Beat: One Theme to Rule Them All

August 2025

With most large-cap companies having now reported second quarter results, it’s time to reflect on both earnings season and the massive U.S. equity market rebound since the post-Liberation Day bottom on April 8. On that date, the S&P 500® Index closed below 5,000 driven by numerous concerns related to new tariffs imposed by the U.S. Administration. Credit markets began showing signs of stress while equity markets briefly entered bear market territory. Since then, the S&P 500 Index has appreciated by 30% reaching all-time highs, while second quarter earnings season reaffirmed the resiliency of the affluent U.S. consumer and re-established a sense of optimism/euphoria around the Generative Artificial Intelligence (AI) theme. The “DeepSeek moment” in January temporarily poured cold water on the idea that vast amounts of capital investment were required to deliver Gen AI innovation. However, second quarter earnings commentary across sectors was dominated by expectations of heightened spend associated with this technology. This “One Theme” has almost single-handedly driven the market recovery post-Liberation Day. Consequently, the eight largest weighted stocks in the S&P 500 Index which combine for nearly 37% of the Index have all outperformed since the market nadir.

During the market sell-off from February 19 (prior market high) through April 8, S&P 500 Index leadership showed signs of broadening. Nearly 60% of Index constituents outperformed the market during that period while Microsoft (MSFT) was the only Magnificent 71 stock to outperform. Technology was the worst performing sector following a multi-year period of significant outperformance.

In contrast, the market recovery has been led by those companies investing heavily in Gen AI technology or those involved in the related infrastructure and compute build out. Market leadership has narrowed significantly, with only 35% of constituents outperforming the S&P 500 Index since April 8. The Industrials sector represents a microcosm of the broader market in recent months, as companies associated with either Generative AI or aerospace account for all the sector’s top 15 performers since the market bottom. Similarly, the fortunes of software stocks in the S&P 500 Index have been bifurcated between perceived Gen AI winners and enterprise seat-based SaaS models (perceived losers).

It is apropos that Palantir (PLTR), among the market’s best performers, is named after the “seeing stones” in The Lord of the Rings epic. Tolkien’s clairvoyance regarding equity markets feels almost tangible. “One Ring” to rule them all, indeed! In truth, many companies conclude that it is still very early days for Gen AI. The true immersive potential of this technology within the economy and society will play out over time. The current list of perceived winners and losers could appear very different in the future. Yet for now, the precious “One Theme” is successfully bending equity investors to its will.

Second Quarter Earnings Season Takeaways

Earnings season has been punctuated by optimism during July for many companies, reflecting an acceleration in activity post the passing of the One Big Beautiful Bill Act (OBBBA) and peak tariff concerns. Still, several economic sectors remain under pressure including many cyclical end markets and anything associated with existing home sales. China remains a weak region for many companies, while the lower end U.S. consumer continues to trade down. S&P 500 Index third quarter and fourth quarter consensus earnings per share (EPS) estimates have held steady since the end of the second quarter, projecting 7-8% year-over-year EPS growth for 2H 2025. While that level might not be strong enough to support a market trading at 22.5x forward P/E, the economically stimulative tax bill and the thawing out of M&A/capital markets activity could prove forward estimates conservative. Where rates go from here, as well as government economic data is anyone’s guess!

Below are earnings season themes supported by quotes from company management teams on earnings calls.

Thanks for reading, and remember to never skip a Beat - Eric

Disclosures:

Stocks: Alphabet (GOOG), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), NVIDIA (NVDA), and Tesla (TSLA), Oracle Corp (ORCL), Broadcom Inc (AVGO), Palantir Technologies Inc (PLTR), Synopsys Inc (SNPS), PTC Inc (PTC), Cadence Design Systems Inc (CDNS), Datadog Inc (DDOG), Gen Digital Inc (GEN), Intuit Inc (INTU), Crowdstrike Holdings Inc (CRWD), Autodesk Inc (ADSK), ServiceNow Inc (NOW), Palo Alto Networks Inc (PANW), Tyler Technologies Inc (TYL), Workday Inc (WDAY), Adobe Inc (ADBE), Salesforce Inc (CRM), Fortinet Inc (FTNT), and Fair Isaac Corp (FICO).

1Magnificent Seven stocks: Alphabet (GOOG), Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), NVIDIA (NVDA), and Tesla (TSLA).

Source: FactSet®. FactSet is a registered trademark of FactSet Research Systems, Inc.

Sectors are based on the Global Industry Classification Standard (GICS®) classification system. Global Industry Classification Standard (GICS®) and “GICS” are service makers/trademarks of MSCI and Standard & Poor’s. FactSet ® is a registered trademark of FactSet Research Systems, Inc. APX® is a trademark of Advent Software Systems.

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Earnings per share (EPS) is calculated as a company's profit divided by the outstanding shares of its common stock.

Forward P/E Ratio is determined by dividing the price of the stock by the company's forecasted earnings per share.