Amidst a challenging external environment marked by the onset of U.S. tariffs in 2Q, reported earnings in Asian market over the quarter have proved notably resilient. The additional tariff related pressure on profit margins has not yet resulted in a significant drag on overall earnings.

With over two-thirds of the MSCI AC Asia Pacific Index’s market cap having published their 2Q25 results, our earnings tracker¹ indicates a year-over-year (y/y) growth of 4.8% in reported earnings and 11.3% in revenue (Exhibit 1). A majority of firms surpassed consensus estimates, with companies delivering earnings above expectations by a ratio of 41% to 36% and an overall positive earnings surprise of 4.6%.

In this note, we review key takeaways from company earning calls, assess the tariff-related impacts, highlight other structural opportunities, and revisit the outlook ahead.

How are tariffs affecting Asian earnings?

While the uncertainty in U.S. trade policies has eased, the implications for corporate earnings are still being evaluated. With tariffs implemented in the middle of the quarter, a primary focus has been on assessing their impact on profit margins, especially for export-orientated companies in the Asian market.

A case in point is the Japanese and broader Asian auto sector. The U.S. accounts for 36% of the segment’s revenue, higher than the market average (Exhibit 2). Auto imports into the U.S. were subject to a 25% tariff rate for most of the quarter, resulting in a large detraction to profits for Japanese carmakers. Most have disclosed a hit to profit margins ranging between 3 to 4 percentage points. Although tariffs will run through the full quarter going forward, management is expecting a shallower margin hit ahead, with only a modest revision to guidance. The milder impact is a result of a new trade agreement introduced in August, which reduces tariff rates for Japanese autos to 15%, but companies are also actively expanding U.S.-based production to avoid tariffs for the domestic market. Furthermore, with minimal price increases observed thus far and a wide latitude expected for consumer price adjustments, the tariff burden may gradually shift from exporters to consumers, thereby easing the pressure on profit margins.

Asia’s technology sector, with the U.S. making up 37% of total revenue, was also hindered by worries about the U.S. tariff announced under Section 232. Although tariff rates on semiconductors were threatened with a 100% headline rate earlier this month, the dynamics in the technology sector are slightly different. Exemptions were made for companies who have pledged high levels of investment in the U.S., with most leading names in Japan, Korea, and Taiwan either planning or already committed to U.S. production. Moreover, Asia’s leadership in technology manufacturing, from semiconductors and memory chips to manufacturing machines, has meant that the artificial intelligence (AI) hardware supply chain should remain a sellers’ market. Buyers may therefore bear a larger share of the tariff burden, while exporters may experience a buffer to their profit margins if renewed AI advancement sustains demand for AI chips and equipment.

How is AI driving demand and investment?

The technology sector reported earnings growth of 13.9% y/y. The upbeat 2Q25 results suggest that AI demand continues to outpace supply. For chip manufacturers, two main trends stood out:

• higher demand for more complex chips to facilitate more efficient computation
• a larger need for AI chips to support a broader AI application

For semiconductor chips, improvements across speed, power and density on newer chip models have meant that these more complex chips could be better suited for applications in both smartphones and high-performing computing. Demand for the new chips is expected to surpass that of previous models at launch. Companies are thus gradually shifting their production mix towards these more complex chips, capturing the increasing demand at the higher-end market and thereby organically lifting average selling prices.

A broadening out of AI demand, from training computation to inferencing computation, on reasoning and agents, has led to increased AI workloads globally and intensifying bandwidth bottlenecks. This means that the growth in computational volume demand will continue to lift the total market demand for memory chips, especially for high bandwidth memory chips which are positioned as a key product for performance enhancement. In both cases, most companies have announced further capex to boost supply (Exhibit 3), reiterating signs of a demand-led market expansion.

Capex momentum continues among leading Chinese internet companies. AI adoption has delivered proven results in driving revenue growth. From immediate external services, such as GPU rental and API token usage in cloud operators, to internal use cases, such as improving advertising suggestions with higher click-through rates and AI-powered game production, the widening range of AI use-cases has led to accelerated revenue growth across various segments of the internet industry.

Uncertainty regarding overseas chip controls means Chinese companies are exploring other available options for inference chips but keeping targets to increase capex. At the same time, companies are also continuing to execute other software improvements to drive inference efficiency to sustain higher AI workload. As the industry gradually shifts AI demand from external services to internal adoption, improvements in AI monetization will likely benefit from higher and more efficient AI investment ahead.

Are domestic sectors holding up?

As for more domestically-orientated sectors, one segment of focus has been the Chinese quick commerce industry, which is due to report results later this month. The recent escalation of price competition could weigh on profit margins this quarter, although given meaningful differences in financial resources and regulators stepping in to address further involution, competitive intensity may moderate ahead.

Elsewhere in the region, select other domestic sectors have also published more upbeat results over the quarter. Korean financials, for example, benefited from resilient fee income and large trading gains. Additionally, announcements of further buybacks and payout programs contributed to the progress in enhancing shareholder returns. Indian financials, amidst margin headwinds and asset quality pressures across the sector, saw higher quality names continue to outperform in earnings results while offering a shelter from further tariff risks.

Investment implications

Similar to results in other markets earnings, expectations remain focused on the impact of tariffs, AI, and corporate governance, alongside other domestic developments.

We expect a degree of resilience from Asian businesses to mitigate tariff impacts while the market continues to benefit from AI advancements, whether as upstream chip manufacturers or downstream application developers.

While valuations at the index level (15.2x forward price-to-earnings (P/E) ratio) still screen reasonably valued compared to developed markets, we see an increasing need for investors to be selective in this market. Differentiation between exporters that are naturally more shielded from tariff risks or are actively mitigating tariff risks, to technology leaders across the hardware and software supply chain that benefit from ongoing AI advancements may have a large impact on investor returns. In addition, option overlays can be deployed on top of investment strategies to enhance income generation.

Active management therefore will remain a key differentiator as investors navigate the many evolving developments in the Asian equity market. 

¹Estimates based on FactSet consensus data. Analysis is based on the MSCI AC Asia Pacific index and includes quarterly reporting companies only (approx. 80-85% market cap). Index-level figures are in USD terms, which are based on FactSet’s average exchange rates for reported numbers or exchange rates as of consensus dates for estimated numbers, while regional market-level figures are in local currency terms, which are override to local market currency instead of listing exchange currency. Beat-miss ratios are based on a 5% margin. Data reflect most recently available as of 18/08/25.

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