The United States (US) third quarter 2025 earnings season has delivered a robust performance for the S&P 500, underscoring corporate America’s adaptability in an environment tempered by geopolitical and tariff uncertainty, cooling inflation and anticipated US Federal Reserve (Fed) rate cuts.
The US equity rally
With approximately 85% of S&P 500 companies having reported by November 5, the index’s year-over-year earnings per share (EPS) growth has clocked in at 10.7%, a notable acceleration from the 7.9% estimate at the quarter’s end in September. This outperformance marks the ninth consecutive quarter of positive EPS growth, with revenue expansion holding steady at around 6.4%. The beat rate – companies exceeding analyst expectations – hovered above 75%, buoyed by upbeat guidance; the number of positive EPS outlook revisions for the third quarter was 20% higher than the historical average. Nine of the 11 S&P sectors posted year-over-year earnings gains, a broad-based strength that has helped propel the index to record highs despite lingering global macroeconomic uncertainties and geopolitical tensions.
Tech and healthcare emerged as the season’s star sectors, driving much of the upside. Information technology (IT), representing almost one-third of the S&P 500’s market cap, saw EPS growth of 15.2%, fuelled by artificial intelligence (AI) tailwinds and cloud computing demand. The “Magnificent Seven” – Microsoft, Meta Platforms, Amazon, Apple, Nvidia, Alphabet, and Tesla – collectively accounted for over 60% of the index’s earnings growth, with their combined EPS surging 28% year-over-year. Standout highlights included Alphabet’s results, where revenue topped $100 billion for the first time, propelled by a 20% jump in Google Cloud sales amid AI infrastructure deals. Meta Platforms delivered a third quarter EPS of $6.03, 14.9% higher than the original expectation of $5.25, alongside 18.9% revenue growth from advertising and AI-enhanced user engagement tools.
In healthcare, UnitedHealth Group’s 12% EPS beat highlighted robust Medicare enrolment and cost controls, while Eli Lilly’s 25% sales surge from weight-loss pharmaceuticals like Mounjaro propelled its robust results. Financials also shone early, with a near-perfect beat rate: JPMorgan Chase delivered an 8.9% EPS surprise on higher investment banking fees, and Goldman Sachs exceeded estimates by 11% thanks to strong trading revenue and merger-and-acquisition fees. These wins have reinforced market confidence, with forward 12-month price-earnings ratios climbing to 23 times on projections of 11.2% full-year 2025 EPS growth.
The stumblers
Yet, the season has not been without its stumbles. Several high-profile misses tempered the euphoria and exposed vulnerabilities in cyclical sectors. Consumer discretionary lagged with just 4% EPS growth, hampered by uneven spending patterns. Tesla, despite a 15% revenue beat, disappointed on margins, with automotive gross margins dipping to 18.5% from 19.8% a year ago. Price cuts and production ramps for Tesla’s Cybertruck were disappointing as the shares fell 7% post-earnings. In financials, Citigroup’s report soured the narrative. Its EPS missed estimates by 5% on elevated credit provisions tied to commercial real estate woes, while regional banks like KeyCorp underperformed amid net interest margin compression. Industrials faced headwinds too, with Boeing’s ongoing 737 MAX quality issues leading to a 22% EPS shortfall and deeper losses. Energy rounded out the underperformers, with ExxonMobil’s 8% EPS miss reflecting softer oil prices despite production gains.
Overall, while misses affected only about 25% of companies reporting, they clustered in rate-sensitive areas, amplifying worries about a potential economic soft landing turning bumpy.
Capex overspend
An important subplot from this quarter centred on the capital expenditure (capex) explosion by hyperscalers. The sustainability of the AI arms race has stoked market jitters. The big five – Amazon, Microsoft, Alphabet, Meta, and Apple – collectively ramped capex to over $100 billion in the third quarter, a 45% year-over-year surge, with AI infrastructure gobbling up the lion’s share. Microsoft hiked its full-year 2025 capex guidance from $91 billion to $93 billion, its third upward revision, driven by Azure cloud AI demand. Meta’s spend hit $19.37 billion in the quarter, prompting a widened 2025 forecast of $70 billion to $72 billion and from $66 billion to $72 billion, prioritising data centres for its Llama AI models. Amazon Web Services and Google Cloud echoed this, with total hyperscaler outlays projected to be $340 billion for the year on AI and data centres. This frenzy has funnelled billions to chipmakers like Nvidia and Broadcom, sustaining their rallies, but at a cost. Hyperscalers now allocate 60% of operating cash flow to capex, a record high that has crimped free cash flow growth and inflated balance sheets.
Market concerns crystallised post-earnings, particularly after Meta’s stock fell 12.3% on 30 October – its worst day in years – despite the EPS beat, as investors balked at the capex escalation without clearer monetisation timelines. Analysts warn of “AI fatigue,” questioning if returns on these investments will materialise before 2027, potentially pressuring valuations if economic slowdowns curb enterprise AI adoption. Echoing this, Alphabet’s shares fell 5% on similar guidance, signalling the end of reflexive buy-the-capex enthusiasm. Broader risks include supply chain bottlenecks for Graphics Processing Units and energy constraints for data centres, which could delay return on investment and exacerbate inflation in power costs. Nonetheless, executives like Microsoft’s Satya Nadella doubled down, calling AI capex “essential infrastructure” akin to the internet buildout of the 1990s, suggesting the spend wave will persist into 2026.
A need to remain cautious as valuations stretched
US third quarter 2025 earnings have affirmed the US market’s tech-led strength, with EPS growth trouncing expectations and selective sector strength offsetting pockets of weakness. Yet, the hyperscalers’ capex binge – while a boon for AI enablers – has ignited debates on fiscal prudence, potentially capping near-term upside if monetisation lags. As investors digest these reports, the focus shifts to fourth quarter guidance and Fed policy, with valuations stretched but fundamentals holding firm.
TURNING TO THE WEEK’S MARKETS
The week’s key themes:
- Mixed economic signals see major government bond yields rise
- US equities experienced a softer week following a strong October performance
- US dollar sees strongest week since September
- Rand experiences volatile week on back of strong dollar and lower precious metal prices
Bonds
The global bond market experienced a modestly risk-averse tone this week, with yields ticking higher across most major government bonds amid mixed economic signals and lingering uncertainty over central bank paths. Investors digested fresh US labour market data showing US economic resilience, which tempered expectations for aggressive Fed easing, while European and emerging markets grappled with currency volatility and commodity price swings. Overall, the Bloomberg Global Aggregate Bond Index dipped 0.2%, in price terms, reflecting a slight steepening of yield curves as short-term rates held firm.
The benchmark US 10-year Treasury yield climbed six basis points to 4.14%, marking a reversal from last week’s dip. A stronger-than-expected ADP National Employment Report on 5 November reinforced the narrative of a healthy US economy, reducing odds of a December Fed rate cut to 62%. This added to last week’s hawkish comments from Fed Chair, Jerome Powell.
German 10-year Bund yields edged up four basis points to 2.67%, leading to a slight pullback in bund prices. European Central Bank (ECB) minutes released on 4 November highlighted a “gradual” approach to normalisation, with officials wary of eurozone growth risks from US trade policy uncertainties post-election. Fiscal concerns in France, with budget deficit projections hitting 6%, spilled over to continental Europe.
The United Kingdom (UK) 10-year yield rose five basis points to 4.46%. Bank of England (BoE) Governor, Andrew Bailey’s 5 November comments struck a dovish chord, signalling potential UK rate cuts if inflation eases further, and provided relief amid budget jitters ahead of the Chanceller of the Exchequer, Rachel Reeve’s Autumn Statement.
The South African 10-year bond fell nine basis points to 8.75% despite global dollar strength and softer gold prices. Lower oil prices continue to support strong terms of trade and a strong local currency. Combined with relatively weak consumer demand, South African inflation remains anchored well below 4%, lending further support to the bond bulls.
Equities
Global equities experienced a softer week, falling 1.1% on the MSCI World Index with losses fairly evenly spread. Tech-heavy sectors led the charge, buoyed by AI optimism and easing rate fears, while energy and materials pulled back on commodity softness. The week’s narrative hinged on a “Trump trade” unwind turning into cautious optimism, with fiscal stimulus bets offsetting tariff jitters.
US equities experienced a softer week following a strong October performance that was supported by a robust third quarter earnings season. The S&P 500 retraced by 0.5% while the tech heavy Nasdaq fell 1%. Concerns emerged over excessive capital expenditure projections for the AI megacaps and limited visibility with respect to future monetisation.
European equities kicked off November on a sombre note, with the Euro Stoxx 600 flat for the week. Third quarter earnings from tech leaders like ASML, which was up 3%, exceeded forecasts on AI chip demand, while the ECB’s 4 November Targeted-Longer-Term-Refinancing-Operations extension bolstered bank liquidity. Eurozone CPI cooling to 1.9% year-on-year, saw December cut odds increasing to around 80%, aiding cyclical stocks (those linked to economic cycles). Market focus now shifts to next week’s ECB decision and eurozone gross domestic product data.
The UK’s FTSE 100 edged up 0.55%, with dividend payers performing well. The slightly weaker Sterling aided exporters like fast moving consumer good company, Unilever, and energy giant, Shell, while BoE signals of a December pause in monetary easing tempered rate-cut euphoria. Mining stocks fell along with falling copper prices but were offset by bank gains on higher-for-longer gilt yields. Budget speculation ahead of the Autumn Statement boosted defensive stocks (goods where demand always remains constant), with consumer staples up 1.1%.
The South African equity market experienced a volatile start to November, with the FTSE/JSE All Share Index dipping 0.4% overall, amid rand fluctuations and softer commodity prices. The JSE Top 40 mirrored the broader trend, down 0.5%, with precious metals mining weighing on performance. There were marginal gains in financials and property sectors reflected dovish South African Reserve Bank signals, but short-term sentiment remained cautious.
Currencies
The US Dollar Index climbed to its strongest weekly advance since September, with gains accelerating after the Fed chair’s comments last week. Against a G10 basket, it appreciated 0.6% on average. US jobs growth reinforced a “higher-for-longer” Fed narrative, trimming December cut odds to 62%. By early Thursday morning, the dollar started rolling over as markets digested the potential for Trumps tariffs being overruled by the US Supreme Court.
Weaker German factory orders, down 1.2% month-on-month, and fiscal spills from France’s deficit woes pressured the euro during the early part of the week. By Thursday, the euro had recovered its losses largely due to an unwind of US dollar strength. The pair traded in a tight $1.148/€ to $1.152/€ range.
Sterling softened 0.4% to $1.30/£, with intra-week volatility peaking at 0.8% on BoE commentary. BoE Governor Bailey’s 6 November remarks hinted at a steady hand, with the BoE keeping rates at 4.75%, but forward guidance leaned dovish on wage moderation as UK CPI came in at 2.1%. UK budget previews suggested fiscal loosening, which aided gilt yields but not enough to counter US dollar momentum.
The rand experienced a volatile week, initially weakening to R17.60/$ before recovering to R17.37/$ – a decline of 0.9%. The US dollar surge amplified rand pressures, compounded by declining precious metals prices. Gold and platinum price dips of 1.5% hurt precious metals equities while fears of local mining strikes added to negative sentiment.
*Please note that all information is at the time of writing.
Key indicators:
USD/ZAR: 17.37
EUR/ZAR: 20.03
GBP/ZAR: 22.80
GOLD: $4,006
BRENT: $64
Sources: Bloomberg, Goldman Sachs, Investec Securities and JP Morgan.
Written by: Citadel Senior Portfolio Manager, Kurt Benn.