The AI revolution stands as the defining narrative across global markets, driving fundamental shifts in capital allocation and valuation frameworks. But there are far more factors shaping the current investing landscape.
Lower interest rate expectations and regulatory reform have reignited investor confidence, while US President Donald Trump’s tariff agenda has injected supply chain uncertainty and continues to impact both corporate margins and consumer spending power. Meanwhile, geopolitical tensions are fuelling unprecedented defence spending and strategic consolidation as companies position for an increasingly fragmented world.
These converging forces created a tale of two markets during the recent 2Q25 US earnings season.
On the surface, the numbers appeared robust: over 80 per cent of US companies beat earnings expectations, guidance upgrades accelerated to double the 1Q25 rate, and consensus pushed earnings growth forecasts to an impressive 11 per cent and 13 per cent for 2025 and 2026, respectively. Yet beneath this veneer of strength lay a more complex reality. Earnings growth concentrated heavily within just three sectors and performance diverged sharply among industry peers.
US 2Q25 Reporting Season – Strong overall growth of 12%, but largely driven by 3 sectors
Source: Bloomberg, 28 August 2025
This polarised landscape has created an unforgiving environment where companies skilfully navigating these themes are thriving, while those stumbling face harsh consequences.
Five themes defining corporate performance
We see these five powerful themes reshaping the investment landscape and these only further evolved and intensified through the latest US earnings cycle:
1. AI from speculation to implementation. While the mentions of AI remain near historic highs, business language has evolved from speculative possibilities to concrete implementation. Management teams are increasingly providing specific use cases rather than broad theoretical benefits, though most companies acknowledge they remain in the early stages of realising meaningful productivity gains.
2. Defence spending accelerates. Global defence expenditure has surged amid a pronounced strategic pivot towards deterrence capabilities and military modernisation. NATO member commitments are escalating from 2 per cent to a targeted 3.5-5 per cent of gross domestic product by 2030, exemplified by Germany’s €500 billion defence infrastructure fund. Global defence spending is projected to expand at 9 per cent annually from a $2.5 trillion baseline.
3. Adapting to the tariff reality. The shift from uncertainty to operational reality has prompted comprehensive corporate responses across multiple fronts. Three-quarters of affected companies are actively restructuring supply chains and renegotiating supplier agreements, while over half are implementing customer price pass-throughs. Strategic import frontloading ahead of tariffs has complicated near-term financial interpretations.
4. Strategic M&A consolidation. Acquisition activity has intensified with a pronounced focus on strategic technology capabilities rather than traditional scale benefits. Well-capitalised companies with proven execution are pursuing disciplined transactions targeting AI competencies, industrial consolidation opportunities, and infrastructure enhancement despite broader economic uncertainties.
5. Consumers not out the woods yet. Despite some recovery from the prior quarter’s sharp deterioration, consumer sentiment remains fragile with management guidance pointing to a challenging second-half outlook. Real consumer spending growth is projected at just 1 per cent annualised through H2 2025, driven by softer employment growth, tariff-induced inflation, and scheduled transfer payment reductions. This environment favours companies with defensive, non-discretionary revenue streams as price-sensitive consumers prioritise essential spending.
Navigating complexity
Today’s investment landscape rewards execution excellence while punishing missteps, as these five forces – AI implementation, defence modernisation, tariff adaptation, strategic M&A, and consumer resilience – create clear winners and losers even within sectors.
Success requires identifying companies that transform these forces into competitive advantages. As earnings dispersion widens and market patience diminishes, broad sector exposure is insufficient.
Investors must focus on best-in-class operators with proven execution capabilities and structural competitive advantages that benefit from, rather than merely endure, the forces reshaping the global economy.
