4Q25 U.S. earnings update

U.S. 4Q25 earnings surprised by less

For the 12th straight quarter, earnings have come in well above consensus estimates at the end of the quarter. However, the magnitude of that beat has slowed in each of the past three quarters. S&P 500 earnings are on track to grow 12.1% year-over-year (y/y), 4.9%-pts higher than expected at the end of the quarter. Looking at the three main sources of earnings per share (EPS) growth, revenues, margins, and buybacks are expected to contribute 7.3, 5.7, and -0.9% pts, respectively. Mega-cap tech stocks are driving 53% of the earnings growth. That’s a lot, but it still leaves around 50% for the rest of the market. Here’s what we are seeing across sectors:

Technology: Hyperscalers¹ are massively growing both their revenue and their costs. Key artificial intelligence (AI) segments, whether cloud or apps, grew an average of 34% y/y, 5% ahead of estimates, but capex grew an average of 70% y/y, 14% ahead of consensus. As a result, most hyperscalers saw double-digit sell-offs the day after reporting. Markets are becoming increasingly less tolerant of a capex increase without a commensurate increase in revenue, as both free cash flow and buybacks come under pressure. To help offset some of the capex costs, management teams are hyper-focused on efficiency improvements like AI coding, custom silicon chips, and reducing headcount in non-strategic areas. Capex is also driving revenues across the supply chain, particularly within the semiconductor, hardware, and electrical components industries.

Financials: Banks are doing well as both consumer spending and credit remain stable despite low sentiment. Market performance is driving the upside. The rebound in IPO & M&A activity and stock market appreciation are growing fees in investment banking and asset & wealth management, respectively.

Industrials: A few one-off accounting gains are boosting growth on paper, but earnings in several industries are fundamentally accelerating. Electrical components are benefiting from the AI buildout, and in aerospace, demand is strong and supply is increasing to meet it. Air traffic is growing in the mid-single digits, and while Boeing and Airbus still have multi-year backlogs, deliveries are finally speeding up, supporting revenues across the supply chain and capacity for the airlines. The aircraft fleet is still an average of two years older than pre-pandemic, which is driving maintenance revenues. 

Why a dip in youth sentiment is worrying

If youth is wasted on the young, today’s youth are wasting theirs worrying. Younger generations are usually more optimistic, but not Gen-Z and Millennials. During COVID, consumer sentiment came in worse for younger adults than for older adults for the first time in survey history. The trend persists today.

Gen-Z and Millennials’ pessimism should concern more than just their therapists. These younger generations are essential to both economic and earnings growth. Together, they make up 44% of the population and 58% of the working-age population.² As of 2023, Gen-Z and Millennials contributed more to consumer spending than Gen-X.

So, why don’t the kids feel all right? Existential angst, namely politics, social media, and climate change, is part of it, but Gen-Z and Millennials also face a unique set of economic challenges: housing affordability, student loans, and a weak new-hire job market.

While older consumers still make up a higher percentage of total spending, younger consumers drive the growth in that spending, and for a far more fundamental reason than doom or non-discretionary spending. As Gen-Z and Millennials move through the first two decades of adulthood, both their income and costs (apartment, car, kids) evolve rapidly. According to Chase credit card data, Millennials and Gen-Z grew year-over-year spending by an average of 7.2% in 2025, 7x faster than Baby Boomers and 4.5x faster than Gen-X.

So, companies over-indexed to Gen-Z and Millennials, especially those catering to lower-income cohorts, could suffer if their economic challenges persist or worsen. At the same time, it is vital to attract younger customers, both to get access to their higher level of spending growth and to build long-term brand loyalty. 

Investment implications

For now, the economic challenges facing Gen-Z and Millennials are hurting sentiment, but not spending. Their spending growth is massively outstripping that of Gen-X and Boomers, making it critical for companies to win with the next generation.

To do so, consumer companies need to cater to young customers’ distinct set of preferences, including their focus on health & wellness, desire for experiences—including in-store shopping—and the hunt for innovation at a good price.

This requires investment, particularly in technology, as the youngest generations grew up with quick delivery, apps, and social media. After 2026 tax refund checks are spent, consumer companies investing for this future could see significant margin pressure as costs increase at the same time that spending growth slows.

Investors should also be aware that Gen-Z and Millennial investors are more speculative. This could be contributing to elevated volatility and concerns about asset bubbles. It could also be painful for the financials and consumer sectors when these young investors inevitably confront their first major bear market.

The biggest risk is a worsening labor market for early career workers, especially with the resumption of student loans.

All in all, investors should recognize that tech-first consumer companies that win with the next generation could not only diversify, but also enhance, earnings growth within their portfolios. 

¹Hyperscalers are five selected large cloud computing companies that own and operate data centers with horizontally linked servers that, along with cooling and data storage capabilities, enable them to house and operate AI workloads.
²Source: U.S. Census Bureau. July 2024.

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