3Q25 earnings exceeding expectations 

The 3Q25 earnings season is once again exceeding expectations, tracking for a fourth consecutive quarter of double-digit growth. Analysts are projecting S&P 500 earnings per share (EPS) growth of 10.3% year-over-year (y/y) vs. expectations of 7.3% at the end of the quarter. Sales have driven around two-thirds of EPS growth, with margins supplying one-third. About 82% of companies have beaten on earnings (vs. 73% on average), coming in 6.6% above expectations (vs. 6.2% on average). At the sector level, most of the index’s earnings growth is coming from technology and financials, while health care and consumer companies look softer. 

Monolith no more

Although earnings season stretches roughly seven weeks, these days, investors only care about one. Five of the mega-cap tech stocks reported last week, and the biggest names in tech are driving 38% of the index’s profit growth, sporting margins of 22%. Markets are rewarding these names more selectively, even after strong results. Admittedly, the value created for shareholders has been impressive—the mega-cap tech stocks are up 191% since the launch of a major AI (artificial intelligence) chatbot tool on 30 November 2022.

However, investors should also be attuned to the volatility and risks of this cohort. Its defensive properties have been inconsistent; the mega-cap tech stocks had a less pronounced drawdown than the index as a whole in 2020, but a deeper correction in 2022 and in the spring of 2025. In 2022, the big tech stocks experienced a peak drawdown of 43%, highlighting that significant pullbacks can still occur within a longer bull run.

Though perhaps the bigger risk is already underway—are the mega-cap tech stocks a fading concept? Four of the mega-cap tech stocks are underperforming the index this year, and only two are in the top 50 performing stocks in the S&P 500 this year. With the technology sector expected to contribute 64% of 2025 earnings growth, all eyes are on the broader AI complex. As prices hit all-time highs, and announcements about more capex, billion-dollar investment deals, and debt issuance fly around, investors are growing concerned that we are in a bubble. 

Is AI a bubble?

AI might be new, but innovations that spur capital investment cycles are not. Profits and productivity have always materialized eventually, but sometimes, though not all the time, markets have gotten ahead of themselves. It is still early days for AI, but we are not seeing too many signs of excessive exuberance.

In previous technological transformations, first movers haven’t always reaped the benefits. Some of the companies that built the internet we still use today have since gone bankrupt. They grew investments faster than demand, prices collapsed, and a decade later, other companies swooped in and built trillion-dollar businesses on that glut of free bandwidth. However, today’s hyperscalers aren’t just building the compute AI needs to run. They also own and operate the network, architect the software layers on top, and control the distribution. The AI transition is different in a few critical ways; profits are keeping pace with enthusiasm, unlike the dot-com bubble, where returns became untethered from earnings growth. Demand precedes investment, with even current amounts not enough to remove backlogs. Financing is mostly cash – not debt. Finally, some have compared recent circular deals to telecom carriers buying up each other’s excess fiber cable capacity during the internet bubble. However, today’s AI deals are strategic investments tied to real demand, built on exponential revenue growth.

Still, investors should not get complacent. Power and graphics processing unit (GPU) supply could constrain growth to below expectations, though this could help prevent excess supply. Adoption appears to be rapid, but sticky revenues from paid subscribers with enterprise-driven use cases are not guaranteed. Faster chip obsolescence could also change the economics. Even a one-year haircut on the useful life of AI infrastructure could be a 3% hit to earnings.  And although circularity may be an essential foundation of investment today, one damaged link could have an outsized impact. 

Investment implications

We might not be in another internet bubble, but today’s mega-cap tech giants aren’t destined for eternal domination either. They are competing against each other, and disruptors will inevitably emerge. With valuations this high and investments this astronomical, there isn’t much room for error. Luckily for investors, investment opportunities have broadened this year, throughout the AI value chain and outside of the realm of AI altogether.

The tech sector continues to post exemplary profits; however, greater dispersion is emerging among the big tech stocks, emphasizing the need for selectivity.

Within AI, beneficiaries should continue to broaden out from the innovators (tech) to the enablers (industrials, utilities), and eventually to the adopters (financials, health care).

Private markets offer additional access to AI opportunities across the capital structure.

Financials have boasted the largest increase in earnings since the beginning of the quarter, contributing 38% of overall 3Q25 profit growth. A resilient macro backdrop, healthy capital markets, transaction activity, and a steepening yield curve could provide a second wind to this recently sideways sector.

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