4Q25 earnings surprising 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% y/y, 4.9%-pts higher than expected at the end of the quarter. Looking at the three main sources of EPS growth, revenues, margins and buybacks are expected to contribute 7.3, 5.7 and -0.9% pts, respectively. The Mag 7 is driving 53% of the earnings growth. That’s a lot, but it still leaves 50% for the rest of the market. Here’s what we’re seeing across sectors:

• Technology:  Hyperscalers (META, MSFT, AMZN, GOOG/GOOGL) are massively growing both their revenue and their costs. Key AI segments, either 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, all the hyperscalers except Meta, whose capex came in a bit below consensus, 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. On the other hand, ground transportation is struggling as manufacturing activity remains muted, and the trucking industry is still drowning in overcapacity.
• Healthcare: Pharmaceutical companies are seeing strong growth as they focus on high price, specialty drugs to treat widespread conditions like obesity, cancer  and skin conditions. However, insurance companies are facing massive margin contraction as the population has been sicker than expected, and medical costs have risen much faster than premium pricing. We’re still catching up from COVID, and the aging population is a structurally higher burden. The rise of mental illness is also driving increased expenses for behavioral health services, and pharmacy costs are rising as people seek specialized treatments like GLP-1s. 

Not your parents’ consumer

If youth is wasted on the young, today’s youth are wasting it worrying. Younger generations are usually more optimistic, but not Gen-Z and Millennials. During COVID, consumer sentiment came in worse for younger vs. 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.¹ As of 2023, Gen-Z and Millennials contributed more to consumer spending than Gen-X, and they now represent half the customers at S&P 500 companies like Starbucks, Delta and Match Group.

So, why don’t the kids feel alright? 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.

1. Housing affordability: Instead of a white picket fence, younger generations are stuck with a landlord. Housing affordability is sitting at a 40-year low.² For young married couples, the average down payment is now 70% of their annual household income (vs. 45% in 2000)³, driving the median age of a first-time homebuyer to an all-time high of 40 (vs. 32 in 2000)⁴. Renting isn’t cheap either. According to Zillow, rent has increased by 5.9% annualized since 2021, outpacing inflation by 1.5% a year.⁵
2. Student loans: Gen Z is leaving the college party and dealing with the student loan hangover. For 18 to 29-year-olds, student loans make up 28% of their total debt, and 9% are severely delinquent. More Millennials have mortgages, so student loans make up a smaller portion of their total debt, but 13% are severely delinquent.⁶ The New York Fed estimates student loan delinquencies can decrease credit scores by over 150 points. This is especially damaging for younger borrowers as it increases their cost of credit right when they need it the most. Even for those who can make their student loan payments, it still means less disposable income and savings.
3. Weak new-hire job market: Technology might be turning against Gen-Z. The unemployment rate for new college graduates is now 2x higher than that for all college graduates. According to researchers at Stanford University, AI could be to blame. Younger workers (aged 22 to 25) in AI-exposed industries, like software engineering, experienced 16% lower job growth than their peers in industries where AI is enhancing, but not replacing, or where it won’t have much of an impact. In contrast, employment trends for older workers across both AI and non-AI-exposed industries were stable.⁷

But the worst thing about the youth economy is still the vibes. The unattainability of homeownership and the drag of student loans make younger consumers feel like they don’t have enough money. In reality, they’re starting off better than any other generation. After adjusting for inflation, the median 25-year-old Gen-Zer makes about 19% more than the median Millennial did at that age, which was about 20% more than the median Boomer made at that same age.⁸

Just because younger consumers have money doesn’t mean they have to spend it. Bad sentiment can cause a pullback, and companies are seeing that among their younger and lower-income consumers. But, in aggregate, these generations seem to be turning to retail therapy instead. In a survey by Credit Karma, 37% of Gen-Z and 39% of Millennials reported “doom spending” and 53% of Gen-Zers said seeing bad news on social media causes them to stress spend.⁹

Younger consumers also seem to have their own definition of discretionary vs. non-discretionary. In another survey by Credit Karma, ~26% of Gen-Z and Millennials viewed skincare and beauty products as “essential” spending vs. 18% of Gen-X. 51% of Millennials and 45% of Gen-Zers would rather reduce long-term savings than give up lifestyle experiences like eating out, travel and fitness memberships, and ~45% of younger consumers said they’re willing to take on credit card debt to maintain non-essential spending that’s important to them.¹⁰ Of course surveys aren’t science, but they can be indicative of generational attitudes.

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 discretionary. 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. On their 3Q25 earnings call, American Express said Gen-Z and Millennials transact 25% more than older generations.

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’s vital to attract younger customers; both to get access to their higher level of spending growth and to build long-term brand loyalty. Here are the ways Gen-Z and Millennials are impacting earnings growth across industries.

In consumer goods and services, younger consumers are cautious and value conscious, but they’re still spending big on simple lifestyle luxuries like health & wellness, and prioritizing experiences, like travel.

• Health & Wellness: McKinsey estimates that Americans spend more than $500bn on health & wellness. It’s growing 4-5% per year, disproportionately driven by Gen-Z and Millennials.¹¹ According to Kenvue, Gen-Z is “a critical demographic driving about half of the growth in the skincare category.”
  
  Companies are increasingly catering to their younger consumers, and for good reason. In 2024, an estimated 81% of TikTok dollar sales went to health and beauty.¹² Este Lauder described, “Our newest TikTok Shop has served to strengthen the performance across channels given how consumers discover, engage and transact… As a result, global online organic sales growth accelerated to double-digit from mid-single-digit in the fourth quarter, leading us to believe we outperformed Prestige Beauty in this strategic channel.”
  
  
• Travel: According to American Express, “Travelers, especially Millennial and Gen-Z, are motivated to book thoughtful, meaningful trips this year.” 70% of those younger travelers surveyed also “like to plan trips that focus on enjoying the journey as much as the destination (e.g. luxury rail, cruises).” ¹³
  
  Indeed, cruises are winning at the intersection of value and experience. According to Royal Caribbean, “We are also seeing strong intent across demographics, particularly among Millennials and younger [consumers] who continue to represent half of our customer base. They not only express their desire to travel more but are increasingly choosing cruise vacations as their preferred way to celebrate meaningful life moments… more than half of the Millennials tell us that they are more likely to consider cruising today compared to two years ago, driven mainly by the attractive value proposition of cruise.”

In food, Gen-Z and Millennials are trying to spend less on everyday takeout, but they’re leaning into dining experiences. Young people products like energy drinks, vapes and protein powder are also driving earnings growth for staples companies.  

• Fast-casual chains: Everyday food-away-from-home is struggling as sentiment weighs on spending for younger and lower income consumers. However, they’re still managing to drive earnings growth with innovations designed to appeal to Gen-Z.
  
  On their 3Q25 earnings call, Chipotle described, “A particularly challenged cohort is the 25 to 35 year-old age group. We believe that this trend is not unique to Chipotle and is occurring across all restaurants as well as many discretionary categories. This group is facing several headwinds, including unemployment, increased student loan repayment and slower real wage growth.”
  
  But not all hope is lost. Chipotle also saw some success: “Through our research, we found that over 90% of Gen-Z consumers say they would visit a restaurant just for a new sauce. Adobo Ranch proved this to be true and was our first new dip in five years that helped acquire new guests and drive incremental transactions.”
  
  Keurig Dr Pepper outlined a similar strategy on their 2Q25 earnings call: “For instance, we know that nearly half of all Americans and almost three-quarters of Gen-Z consumers try a new beverage every month. This year, we are satisfying their thirst and curiosity through a robust flavor-oriented innovation slate in carbonated soft drinks, which has been highly successful to date.”
  
  
• Restaurants: Younger consumers may be pulling back on food away from home, but they’re also leaning into dining out as a simple luxury experience. According to OpenTable, 77% of Millennials said dining out serves as a social plan vs. 58% of the broader population. For 58% of Americans, a restaurant’s “Instagram/TikTok worthiness” is important, and for 25%, it’s extremely important.¹⁴ 
  
  On their 4Q25 earnings call, American Express stated “Our dining assets are driving high levels of engagement, with spend at U.S. Resy restaurants by U.S. customers up by more than 20%. Momentum from younger customers also continued. As of Q4, Millennial and Gen Z customers now make up the largest share of U.S. consumer spending, and they remain the fastest-growing cohorts. That momentum is driven by our success in attracting younger customers into the franchise. For example, the average age of new customers is 33 on the U.S. consumer Platinum card and 29 on the U.S. consumer Gold card, giving us a long runway to grow our relationships with these customers over time.”

In financials, companies are developing new payment and investing products to cater to Gen-Z and Millennials.

• Payments: Credit cards have been the payment method of choice since the 1980s, but younger consumers are finding other ways. Digital wallets (Apple Pay / Google Pay), peer-to-peer (Venmo / Zelle / Cash App), and BNPL (Klarna / Affirm / Afterpay) are all disrupting the industry. BNPL in particular skews younger. For borrowers aged 18 – 24, BNPL purchases made up 28% of their unsecured debt vs. 17% for all borrowers.¹⁵
  
  In 2025, PayPal’s BNPL grew almost three times faster than overall payment volume. On their 3Q25 earnings call, management stated, “…we're very excited about BNPL. We see this as one of those generational shifts that's happening now…particularly a younger generation is moving more and more towards debit and BNPL…to make purchases. And we think we're incredibly well-positioned to win there.”
  
  In their 3Q25 earnings call, Truist highlighted “Digital transactions rose 7% year-over-year and digital channels accounted for 40% of new-to-bank clients. Notably, Gen-Z and Millennials represented 63% of this growth, a strong signal that our digital first approach is resonating with the next generation of Truist clients.”
  
  
• Wealth management: Gen-Z and Millennials also have different preferences when it comes to investing. They’re more speculative and using social media to learn. In addition to the high-level implications for markets, wealth management firms are growing earnings by creating new products and marketing strategies to win with younger investors.
  
  On their 4Q25 earnings call, Charles Schwab stated, “Our average age of our client has fallen by about 10 years in the last decade and is now in the 40s. A third of our new-to-firm clients last year were Gen-Z investors, and we're going and attracting them in the places they are. We're all over TikTok and Instagram, and we're the most followed financial services company on YouTube.”

In other industries, the economic challenges facing younger generations are a direct hit to earnings growth.

• Homebuilders: The affordability crisis is hurting revenues and margins as builders offer incentives to try to stimulate demand.
  
  PulteGroup emphasized their largest price decreases are for first-time homebuyers: “…the biggest change in price came in the first-time segment…last year, average price in first-time was $467k. That's down to $438k. So, we're down about 6% in price on first-time, which is where the majority of the affordability pinch is really being felt.”

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 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 spending growth slows.
• Investors should also be aware 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. 

¹ U.S. Census Bureau. July 2024.

² National Association of Realtors, Fannie Mae, Census Bureau, J.P. Morgan Private Bank, J.P. Morgan Guide to Alternatives. Housing affordability is based on the ratio of median household income to qualifying income on existing home sales price where qualifying income = 4 * annual mortgage cost. Data are as of July 31, 2025.

³ Goldman Sachs. The Growing Challenge of Housing Affordability. Elsie Peng. February 2, 2026.

⁴ National Association of Realtors. 2025 Profile of Home Buyers and Sellers. November 2025.

⁵ Zillow Observed Rent Index (ZORI) vs. headline CPI inflation from 1/31/2021 through 12/31/2025.

⁶ Federal Reserve Bank of New York. Quarterly Report on Household Debt and Credit. November 2025.

⁷ Stanford Digital Economy Lab. Canaries in the Coal Mine? Six Facts about the Recent Employment Effects of Artificial Intelligence. Erik Brynjolfsson, Bharat Chandar, and Ruyu Chen. November 13, 2025.

⁸ Corinth, Kevin, and Jeff Larrimore (2024). “Has Intergenerational Progress Stalled? Income Growth Over Five Generations of Americans,” Finance and Economics Discussion Series 2024-007. Washington: Board of Governors of the Federal Reserve System, https://doi.org/10.17016/FEDS.2024.007.

⁹ Intuit Credit Karma. Economic concerns heighten as young Americans doom spend to cope with stress. October 31, 2024.

¹⁰ Intuit Credit Karma. New Necessities: Young Americans redefine essential spending amid economic uncertainty. April 30, 2025.

¹¹ McKinsey & Company. The $2 trillion global wellness market gets a millennial and Gen z glow-up. May 29, 2025.

¹² Nielsen IQ, GfK, World Data Lab. Spend Z. June 18, 2024.

¹³ American Express Travel. 2025 Global Travel Trends Report.

¹⁴ OpenTable. 2026 Dining Trends Report.

¹⁵ Consumer Financial Protection Bureau. Consumer Use of Buy Now, Pay Later and Other Unsecured Debt. January 2025. 

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The firms highlighted above have been selected based on their significance and are shown for illustrative purposes only. They are not recommendations.