Asian earnings update: Third quarter’s the charm?

After two consecutive quarters of muted growth, Asian equity earnings are set for a notable rebound in 3Q25. According to our earnings tracker¹, Asian equities are projected to deliver 16.4% y/y earnings growth for the period, with beat-miss ratios standing at 40%-to-32% relative to consensus expectations (Exhibit 1).

Technology remains the largest driver of Asia’s earnings strength, contributing 8.3 percentage points to 3Q25’s year-over-year (y/y) growth, as artificial intelligence (AI) continues to be a critical tailwind for Asian equities. That said, earnings strength this quarter has not been confined to technology alone, as other sectors have also demonstrated resilience. Notable beneficiaries include cloud service providers and internet platforms monetizing AI, as well as financials and trading companies that have benefited from a supportive macro-policy backdrop. These gains have helped offset ongoing pressures in consumer discretionary segments, where both external and domestic headwinds persist (Exhibit 2).

In this note, we provide a sectoral review of quarterly fundamental performances, assess key insights from earnings calls on industry trends, and outline the investment strategy outlook. 

Precious memories, priceless chips

Leading technology names across the AI hardware supply chain in Japan, Korea, and Taiwan have delivered another quarter of strong, above-estimate earnings growth, as AI memory chips, semiconductor chips, and SPEs (semiconductor production equipment) remain in high demand. Earnings calls have also consistently highlighted surging demand for AI-related hardware, which, given the constraints of limited industry supply, has led to a shift from increased sales growth to enhanced pricing power.

For semiconductor foundries, robust AI chip demand has enabled higher production utilization rates, mitigating margin dilution from overseas expansion. The scheduled introduction of next-generation chips is expected to sustain elevated pricing over the medium term. In the memory segment, persistent demand-supply imbalances have driven industry inventories to subnormal levels. Management teams at major suppliers have reported that 2026 output is already fully committed, reducing the risk of excess supply and exerting upward pressure on prices, as evidenced by recent memory price increases.

This surge in AI hardware demand has led to further capacity increases, transmitting demand upstream to even the SPE industry, as firms have recorded another strong quarter of earnings and have noted increasing inquiries for next year’s wafer fabrication equipment and custom ASIC (Application-Specific Integrated Circuit) tester orders. Collectively, these trends point to a demand-led supply shortage in the upstream hardware market, and while this places a ceiling on near-term shipment volume, the stronger pricing power has enabled suppliers across the ecosystem to increase profit margins and thereby sustain earnings growth.

While evidence continues to point to robust demand for AI hardware in Asia, it is important to note potential risks. Demand for AI hardware remains highly concentrated. With the U.S. accounting for 38% of revenue in Asia’s technology sector, this highlights the significant reliance on sustained data center expansion in the U.S. Moreover, rather than a risk to final demand for AI, an imbalance in energy demand-supply is emerging. The growing risk of electricity shortages needed to power data centers could become a supply chain constraint, potentially limiting the pace of hypergrowth across the AI ecosystem. 

Ascending to monetization

Downstream, datacenter capacity is being outpaced by the surging demand for AI compute. CSPs (cloud service providers) have recorded robust earnings in the quarter, with most citing unmatched AI-driven demand, especially in China, given policy support to reach a 70% AI penetration rate² by 2027. As such, most CSPs have revised capital expenditure to further increase server capacity in order to capture the expanding market, reflecting broad optimism on AI demand. However, with the industry constrained by a shortage of AI chips, a trifurcation is emerging: CSPs with proprietary chip capabilities are able to continue accelerating cloud capacity expansion, CSPs relying on foreign chips are beginning to turn to domestic AI chip solutions, while others are prioritizing internal use to maximize efficiency in AI model development. Nonetheless, consensus points to sustained growth in AI compute demand across the ecosystem.

On the application layer, AI monetization is broadening out through different use channels. This has allowed internet names to profit from AI capabilities through expanded business solutions and productivity-led margin expansions. From enhancing advertising efficiency via AI-powered mobile applications to offering premium features such as document processing and photo editing, AI adoption is increasing, with the evolution toward agentic AI also expected to further amplify demand across the ecosystem. 

Tight margins, tough choices

That said, internet names in the consumer discretionary space remain under pressure. The shift toward quick commerce has demanded significant investment, while intense subsidy competition, especially in China’s food delivery industry, has led to steep losses, with some firms anticipating continued losses into the next quarter. Nevertheless, hints from management commentary that consumption appears to be on a recovery trend, anti-involution measures, which are expected to put a floor on further deterioration in irrational subsidy levels, and improving profitability from overseas expansions, should offer some optimism amidst the domestic challenges.

External headwinds are also evident, particularly in the automotive sector, as U.S. tariffs have weighed on earnings. Despite mitigation efforts such as production relocation, most leading firms still reported a 3.6–3.8% margin impact from tariffs this quarter. However, industry revenue has retained positive y/y growth, as the strategic pivot to HEVs (hybrid electric vehicles) has continued to gain popularity overseas. Also, with tariffs set to reduce (September in Japan, November in Korea) alongside the U.S.’s recent extension of the tariff offset program³, these developments should facilitate a near-term profit recovery.

A pivot in policy winds

Already staging a turnaround are Asian financials, which contributed 3.8 percentage points to 3Q25’s y/y growth, as the macro backdrop turned supportive. With Asian central banks slowing policy interest rate cuts, or in some cases, expected to maintain an extended pause, this has alleviated pressure on banks’ net interest margins (NIMs), with several institutions revising guidance upward in anticipation of near-term stabilization.

Regional dynamics further reinforce this momentum. In India, aggressive monetary easing this year has led to higher credit demand and accelerated loan growth, supporting net interest income for local banks. Japanese and Korean banks have also benefited from strong performances in the domestic equity market, which has driven higher growth in fee income, in addition to ongoing commitments to raise dividend payout ratios for shareholder returns. In China, the launch of consumption loan subsidies was a key tailwind to loan growth and net interest income. And despite recent market worries over mortgage delinquency, commentaries from banks suggest that risks remain manageable, as loan-to-value ratios remain low and the high portion of first-time homebuyers, who have a stronger willingness to repay, suggests that asset quality remains robust across the industry.

Investment implications

Asian equities have delivered an impressive 26.6% year-to-date return. Assuming flat returns in December, 2025 will still mark the region’s strongest annual performance in eight years. However, it is notable that only 40% of this rally was driven by upward revisions on earnings growth. As equity valuations have now normalized and are no longer considered cheap, the path to a sustainable rally in 2026 will increasingly depend on continued earnings growth revisions and dividend yield, rather than further valuation re-rating.

And while valuations are inherently sentiment-driven and can be difficult to gauge, especially amid recent concerns about a potential AI bubble, a granular review across the technology supply chain and related sectors reveals that AI demand and underlying fundamentals remain exceptionally robust, with limited evidence of speculative excess. This supports a constructive outlook for technology and related sectors, provided investors remain attentive to underlying business performance.

Against this backdrop, investors may consider adopting a barbell strategy, balancing allocations between high secular growth opportunities, such as leading technology firms, and income-generating assets, including high-dividend sectors and option overlay strategies. This approach can help capture upside from structural growth drivers while providing resilience through steady income streams (Exhibit 3).

More importantly, sector dynamics in Asia are evolving rapidly, with several industries poised for near-term turnaround. As such, navigating the investment landscape in 2026 will require a disciplined focus on in-depth fundamental research and timely sector rotation, making active management most crucial in aligning with shifting market leadership and emerging opportunities.

¹Analysis is based on the MSCI AC Asia Pacific index and includes quarterly reporting companies only (approx. 80-85% market cap). Earnings refer to GAAP net income. Estimates based on FactSet consensus data. 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 01/12/25.
²“Opinions of Deeping the Implementation of the ‘Artificial Intelligence+’ Imitative”, State Council, August 2025.
³“Adjusting imports of medium- and heavy-duty vehicles, medium- and heavy-duty vehicle parts, and buses into the United States”, October 2025.

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