Weekly Market Update - 12 August 2025

The last few weeks in markets have been dominated by the release of US second-quarter earnings, with the greatest number of companies reporting in the two weeks to mid-August. Against the volatility and uncertainty generated by trade wars and signs of more deteriorating economic data, what have been the key takeaways?

Earnings season is a key barometer of how US listed companies, both large and small, are performing, by detailing their operational and financial environment i.e. how they are faring on ‘Main Street’ as well as in overseas markets. Companies will also provide their guidance on prospects.

The good news is that so far, about 80% of companies in the S&P 500 index reported higher sales and earnings in Q2, compared to the equivalent period in 2024 (according to data from financial data provider Factset.

Positive earnings surprises were dominated by the very strong performance of almost all the ‘Magnificent 7’ companies across the communication, information technology and consumer discretionary sectors. Combined, these companies now account for just over a third of the S&P 500’s total value, a near three-fold increase over the past decade. While overshadowed by tech results, the financials sector has also delivered good earnings, helped by the higher-for-longer interest rate environment as well as the market volatility boosting trading income.

A divergent returns season – tech dominates

There remains a sharp divergence in Q2 returns between the ‘Magnificent 7’ mega-cap technology companies and the remainder of the index, as this week’s chart in the ‘In The Picture’ reflects. More broadly, tech-related companies now account for more than half of the US stock market’s value, while the defensive sector has slumped to less than 20%.

This outperformance for tech companies has been fuelled by the strong demand for investing in cloud computing and AI infrastructure, as well as a rebound in digital advertising. Crucially, during this latest earnings season, companies in this sector have continued to provide upbeat outlook comments. Many have also taken the opportunity to raise their full-year 2025 sales forecasts, easing concerns about a slowdown in the demand for AI services, even if global economic growth falters. Some are also projecting an improvement in profit margins, reflecting ongoing productivity gains.

The struggling broader market

In contrast with the strong performance of technology stocks, the broader market (‘the S&P 493’) battled some headwinds during the second quarter, including:

• slower consumer demand, particularly for non-essential items such as holidays, eating out, cars, furniture and appliances
• higher levels of unsold goods as demand slows. This may lead to discounting and cuts in production
• the weakness of the US dollar against other key currencies since the beginning of 2025, meaning that imports of raw materials become more expensive
• tariffs, which are contributing to the deteriorating business environment.

A weak oil price, the weak energy sector

The energy sector has generated the weakest earnings during Q2. A 21% decline for the oil price in the 12-months to June 2025 was the major culprit. Elsewhere, the materials sector, involved in the extraction and processing of raw materials such as iron and copper ore, was another weak performer. Many analysts are forecasting that global economic growth is set to slow in 2026.

Investors are willing to climb the ‘Wall of Worry’

Q2 earnings growth for companies in the S&P 500 have risen by almost 8% year-on-year according to London Stock Exchange data. This index has recovered all the ground lost since the announcement of the ‘Liberation Day’ tariffs in April and is once again close to its all-time high.

According to Peter McLoughlin, Head of Discretionary Fund Management Research at SJP, investors are currently willing to climb “the wall of worry” as the positive momentum fuelling the AI revolution shows no sign of slowing. He observed that “earnings have once again exceeded expectations – this is the third consecutive quarter of double-digit EPS growth, and current guidance suggests a high degree of resilience despite tariff concerns”. Yet he warns there could be some headwinds ahead. With US government debt growing rapidly – it now stands at US$37 trillion, Peter points to a deteriorating macro picture. This includes the rising unemployment rate, as well as a weaker dollar. Inflationary pressures are also increasing, while the trade war is unsettling businesses and contributing to margin pressure (as not all the extra tariff costs are currently being passed on). This was highlighted by post results calls with analysts, where key issues highlighted by company managements were ‘tariffs’, ‘uncertainty’, ‘inflation’ and ‘recession’.

Markets – the week in review

US markets recovered from the previous week’s sell-off, with all key US indices ending higher. The tech-focused Nasdaq led the way, closing at a record high helped by double returns from Apple. Investors seemed less fazed by the latest set of tariffs announced during the week, in part as the US administration is showing flexibility on exceptions for key domestic sectors.

Across Europe, major markets also ended higher. Renewed optimism about talks to end the war in Ukraine buoyed sentiment. In contrast, the FTSE-100 struggled to make much headway. This was despite a 0.25% rate cut, likely in response to a weaker jobs market and even as the Bank of England forecast that September inflation is set to rise to a two-year high of 4%.