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Commencing the Quarter – Q4’25

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Our thought leadership this week addresses:​​

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This week, our Thought Leadership covers:

Key Events

Venezuela: Political Transition & Oil Outlook

  • U.S. forces captured Venezuelan President Nicolás Maduro and his wife in early January, and both have since been transported to the U.S. to face criminal charges related to alleged narco-terrorism. Vice President Delcy Rodríguez has been installed as acting president. (Source: Bloomberg)
  • In the aftermath, the U.S. has asserted control over Venezuelan oil exports, begun marketing crude globally, and is encouraging U.S. oil companies, including Chevron, ConocoPhillips, and Exxon Mobil, to rebuild infrastructure and revive production. Venezuela holds the world’s largest proven oil reserves, estimated at 303B barrels as of 2023, more than 5x the roughly 55B barrels held by the U.S. (Source: Bloomberg)

Employment

  • December ADP report showed private-sector employment increased by 41K (+4.4% YoY), coming in modestly below consensus estimate of 47K. The December increase followed a period of softness in hiring, as private payrolls had declined in three of the four months prior, including a 32K job decline in November. Job gains in December were concentrated in education and health services, as well as leisure and hospitality. (Source: ADP, CNBC)
  • The November U.S. JOLTS report showed job openings were little changed at 7.1M (4.3% rate), with notable declines in accommodation and food services, as well as transportation, warehousing, and utilities. The hires rate held steady at 3.2%, while separations were unchanged at 3.2% and the quits rate edged down to 2.0%. Layoffs remained stable at 1.1%. Overall, the data continues to point to a low-hire, low-fire labor market, with turnover continuing to decelerate. (Source: Bureau of Labor Statistics, CNN)
  • The December Challenger report showed U.S.-based employers announced 35,553 job cuts, down 50% from November and the lowest monthly total since July 2024. Employers also announced 10,496 hiring plans, a 16% MoM increase and the highest December total since 2022. Job cuts in December were primarily driven by store, unit, or department closures, followed by market and economic conditions and restructuring. While AI accounted for a limited share of December cuts (142), it remains a notable contributor to layoffs YTD. DOGE-related actions continue to represent the largest source of announced layoffs in 2025. (Source: The Challenger Report)
  • December nonfarm payrolls increased by 50K, slightly below the 60K consensus estimate. The unemployment rate declined to 4.4%, while labor force participation was little changed at 62.4%. Average hourly earnings rose 0.3% MoM, lifting annual wage growth to 3.8%. Job gains were concentrated in food and drinking places, health care, social assistance, and the federal government, while retail trade recorded the most notable declines. (Source: Bureau of Labor Statistics, CNBC)

Tariffs

  • The U.S. Supreme Court is expected to release decisions on select cases this morning, with market focus on a potential ruling addressing the scope of presidential tariff authority under the International Emergency Economic Powers Act (IEEPA). Following oral arguments in November, several justices appeared skeptical of the administration’s broad interpretation of the statute, and markets broadly expect the Court to invalidate at least portions of the IEEPA-based tariffs, potentially lowering the U.S. effective tariff rate from an estimated 16.8% to 9.3%. (Source: Bloomberg)

Q4’25 Earnings Communication Digest

Every quarter, we analyze earnings communications from off-cycle companies reporting over the past month to identify key themes and emerging trends across market capitalizations and sectors.

Sector Count
Technology 35
Industrials 24
Consumer Discretionary 23
Consumer Staples 16
Healthcare 5
Communication Services 2
Financials 2
Total 107

The U.S. equity market closed 2025 near record highs, with the S&P 500 up 17%, marking one of the strongest 3-year runs on record. The rally was driven primarily by technology and AI-linked stocks, led by the “Magnificent 7.” However, as investors look ahead to 2026, our ongoing investor outreach highlights growing concerns around elevated valuations and the sustainability of AI-related spending, with increased scrutiny of companies’ ability to demonstrate a clear return on investment. These dynamics are driving renewed interest in the “other” 493 companies, which have climbed just 1.8% since October.

Global markets also delivered strong performance in 2025, with the FTSE Index up 22% and the Hang Seng rising 28%.

Recent management commentary reflects a still challenged and uncertain macro backdrop but with cautious optimism for gradual improvement heading into 2026. While inflation has moderated, its cumulative impact continues to weigh on consumer confidence and discretionary spending, particularly among low- and middle-income households. Adding to near-term pressure, the recent government shutdown temporarily disrupted volumes, delayed orders and funding, and further weighed on consumer confidence, though activity has largely resumed following its resolution. As a result, companies are guiding conservatively, though stable labor conditions and expectations for easing interest rates provide some support to longer-term outlooks.

Technology investments, particularly in AI, are increasingly viewed as a critical offset to macro and demand pressures. Across industries, companies are accelerating enterprise-wide AI adoption to drive productivity, automate workflows, enhance customer engagement, and unlock structural cost efficiencies—demonstrating tangible ROI. Executives now frame AI not as a future opportunity, but as a present-day productivity engine supporting margin expansion, scalability, and competitive differentiation. We’ve outlined best practices for AI messaging in our 2026 Letter To Our Clients.

Consumer behavior continues to skew increasingly value-driven. Lower- and middle-income households are trading down and leaning more heavily on promotions and discount channels, while higher-income consumers remain relatively stable but are also becoming more price conscious. This K-shaped dynamic is reshaping pricing, assortment, and promotional strategies across retail and consumer categories. To manage tariff and cost pressures, companies are prioritizing supply chain diversification, sourcing flexibility, private-label expansion, and selective pricing actions over broad-based price pass-throughs.

Europe and North America are showing relative resilience, supported by infrastructure spending, select end market strength, and enterprise demand. Asia is uneven, with strength in certain markets offset by continued caution and de-risking in China. Overall, companies are balancing geographic diversification with prudent risk management as global growth remains uneven.

Earnings Topics

Key trends from our analysis of off-cycle earnings calls include:

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Macro & Outlook

A Pressured Consumer Persists; Expectations for 2026 Are for Gradual Improvement as Rates Ease, Labor Stabilizes, and VUCA Moderates (Maybe) 

  • Worthington Steel ($1.5B, Metals & Mining): “While the macro remains uncertain, we believe conditions are setting up for improvement in calendar year 2026 as interest rates ease and some policy uncertainty subsides.”
  • Hormel Foods ($13.6B, Food Products): “The consumer is quite strained feeling the cumulative effects of inflation, feeling some of the uncertainty in the macro environment. Consumer sentiment remains quite low. We expect the consumer to continue to exhibit value-seeking behavior throughout the year. We are…forecasting a continued difficult environment from a consumer standpoint throughout 2026.”
  • Winnebago ($0.9B, Automobiles): “We’re anticipating…another two to three 25-point cuts over the next year. What happens to the 10-year is probably more important for our industry as it relates to floor plan financing costs as well as retail financing. There’s differing points of view, as to what will happen with the 10-year rate as it relates to the correlation between that and the Fed funds rate.”
  • Lennar ($32.1B, Household Durables): “Consistent with Q3, the macro economy remained challenging through Q4.While mortgage rates drifted marginally lower in Q4, consumer confidence became even more challenged by economic uncertainties, and of course, became even more challenged still by the government shutdown. Cost inflation has clearly had a significant impact on the lifestyle of the average American family. At the same time, concerns about job security have become increasingly prominent, as advancements in modern technology and AI raise important questions about the future of employment for the American workforce.”
  • Conagra Brands ($8.8B, Food Products): “We guided to a wider range this year than we normally do because we were very clear-eyed that it’s a volatile environment and there can be things that unfold that are very difficult to predict.”
  • Paychex ($45.6B, Professional Services): “Regarding the labor market, our clients’ workforce levels remain relatively stable, with flat same-store employment growth this quarter. Our Small Business Employment Watch Index, while down from last year, has remained relatively stable throughout 2025, and our other indicators show no signs of a recession at this time.”
  • Penguin Solutions ($1.3B, Semiconductors & Semiconductor Equipment): “Our outlook for FY26 is based on the current environment, which contemplates, among other things, the global macroeconomic environment and ongoing supply chain constraints. This includes extended lead times for certain components that are incorporated into our overall solutions, impacting how quickly we can ramp existing and new customer projects and fulfill customer orders.”

Mixed Signals Across Sectors Continues, with Resilience in Aerospace, Luxury Travel, and AI-Driven Industries; Retail and Consumer End Markets Face Softer Volumes, Higher Promotion Intensity, and Affordability-driven Pressure

  • KB Home ($4.1B, Household Durables): “Low consumer confidence, affordability concerns, and elevated mortgage rates continue to constrain the pool of actionable buyers.”
  • Carnival ($38.0B, Hotels, Restaurants & Leisure): “In reality, the disconnect between consumer sentiment and actual booking behavior continues to reinforce what we’ve said for a long time: demand for our cruise lines is proving far more resilient than traditional macro indicators would suggest.”
  • MSC Industrial Direct ($5.1B, Trading Companies & Distributors): “Demand across the majority of our primary markets is stable.Aerospace remains strong, while some areas of softness remain in automotive and heavy truck.”
  • General Mills ($26.9B, Food Products): “While we’re encouraged by the progress we’re making in improving volume, we’ve seen a change in consumer behavior this year that is driving an increase in the cost of volume across our categories. More specifically, with lower and middle-income consumers continuing to feel significant economic pressure, we’ve seen them make a greater proportion of their food purchases on promotion rather than at everyday prices.”
  • Nike ($103.1B, Textiles, Apparel & Luxury Goods): “The cycle that it started to feed itself, soft demand leading to consistent promotions and then impacting profitability. We did signal last quarter because of the structural differences that China would be on a different timeline, so we’re taking action and cleaning up the marketplace of aged product.”
  • Lennar ($32.1B, Household Durables): “Q4 results reflect a continued softening of market conditions and affordability. Sales volume has been difficult to maintain and required additional incentives to achieve our expected pace and to avoid an unintended buildup of excess inventory.”
  • Synopsys ($91.6B, Software): “We are operating amidst a multi-trillion-dollar AI infrastructure buildout, which is driving robust semiconductor demand and design starts for both specialized and general-purpose compute. We’re also seeing stronger semiconductor demand in mobile and automotive, while markets like industrial and China broadly remain subdued. AI will revolutionize every industry, demanding more compute performance while compounding engineering complexity.”

Created Temporary but Notable Headwinds, Pressuring Volumes, Delaying Orders and Funding, and Weighing on Consumer Confidence 

  • Albertsons ($9.7B, Consumer Staples Distribution & Retail): “While temporary headwinds from the government shutdown and delayed SNAP funding negatively impacted sales by ~10 to 20 bps, we sequentially strengthened our YoY unit trends.”
  • MSC Industrial Direct ($5.1B, Trading Companies & Distributors): “The decline in volumes was largely driven by the federal government shutdown, which negatively impacted sales by approximately 100bps in the quarter. This headwind was felt most in the public sector. Following the resolution of the shutdown however, we have seen public sector sales resume growth in December.“
  • Conagra Brands ($8.8B, Food Products): “The government shutdown and pause in SNAP payments led some retailers to slow down ordering near the end of the quarter.”
  • Lennar ($32.1B, Household Durables): “The coincident threat of government shutdown in September and the actual shutdown from October 1 through mid-November further eroded already weak consumer confidence. While traffic was consistent, customers were both hesitant and limited by what they could afford to purchase.”
  • AeroVironment ($15.7B, Aerospace & Defense): “With the government shutdown impacting both our fiscal Q2 and Q3, we have seen delays in some of the orders, and therefore are shifting the projected revenues to the right.”
  • RPM International ($15.1B, Chemicals): “The DIY demand softened, particularly in late October and through November, resulting in sales declines for those months. The government shutdown contributed to this slowdown, as we saw activity in certain construction sectors tied to government funding come to a near standstill and consumer confidence declined.“

Across Sectors, Companies Are Mitigating Tariff Pressures Through Supply-Chain Reconfiguration, Sourcing Flexibility, and Selective Pricing Actions, Prioritizing Value Perception and Margin Protection 

  • Costco ($410.2B, Consumer Staples Distribution & Retail): “Our buyers continue to do a great job reducing the impact of tariffs for our members.The strategy is being deployed to achieve this include changing the country of production for some items, sourcing more items produced in the U.S., consolidating buying efforts globally to lower the cost of goods across all our markets, and leaning into Kirkland Signature, where we have more control over the supply chain.”
  • Donaldson ($9.5B, Machinery): “We partially offset increased operating costs with pricing, including pricing related to tariffs, as we are successfully mitigating that impact. We still expect gross margin expansion for the full year with most of the favorability in 2H as our footprint optimization projects come to completion and we benefit from volume leverage that accompanies our typical seasonality.”
  • Albertsons ($9.7B, Consumer Staples Distribution & Retail): “We continue to invest in value through loyalty enhancement, personalized promotions, and selective price investments in key categories. And these actions, combined with vendor funding and Own Brands innovation, are strengthening engagement and driving unit growth. In the divisions where we’ve launched our new lower price campaign, we continue to see fundamentally better unit trends and growth in unit share, reflecting the impact of our targeted strategies. We also very carefully manage the pass-through inflation to deliver value for customers across the entire company, ensuring affordability while protecting margin.”
  • Lululemon ($21.1B, Textiles, Apparel & Luxury Goods): “In a world with higher tariffs and the removal of the de minimis provision, and while we work to inflect the U.S. business, we have a heightened focus on ensuring we’re operating as efficiently as possible across the enterprise. We’re taking actions [including] strategic pricing, supply chain initiatives, [such as] vendor negotiations and DC network efficiency, and enterprise-wide savings initiatives.”
  • Cintas ($82.5B, Commercial Services & Supplies): “We’re not immune from impacts of higher costs from tariffs. We’re certainly staying on our toes because the sourcing environment is dynamic and there certainly could be changes coming as well [in the tariff environment]. We take a long-term approach on pricing. We don’t simply just pass along those costs to our customers because we operate in a really competitive environment. And those customers have choices, so we’ve got to work really diligently to mute the cost impacts of tariffs and other costs that are going through. And we’re extracting out those inefficiencies and doing the very best we can to make sure that we’re positioned for success to grow our margins.”
  • Dollar Tree ($19.2B, Consumer Staples Distribution & Retail): “The [price] elasticity has come in as we’ve modeled it. It’s very manageable. It’s really offset by the mix we see in the multi-price.But most importantly, the value perception is intact. Our customer is responding across all income cohorts, core customers, new customers, the 60% of the new 3 million that have come in making more than $100,000. So, we believe that the elasticity is very manageable. As for the tariffs, we have one of the very best global sourcing teams in the business. They’ve got great partners watching this. We’ll see how it unfolds with the Supreme Court, and we’ll take action from there.”
  • Ciena ($20.6B, Communications Equipment): “We continue to work to mitigate input cost pressures through supply rebalancing, designing cost-out and additional pricing actions over time.We expect the impact of these mitigation efforts will be realized in late fiscal 2026. With these dynamics, we expect the margins to improve 1H to 2H, as cost reductions and pricing actions take hold.”

Remains Strained and Increasingly Value-driven; Low-and Middle-Income Households Trade Down, While Higher-Income Consumers Remain More Stable but Are Also Becoming More Price Conscious 

  • Albertsons ($9.7B, Consumer Staples Distribution & Retail): “Consistent with what you’ve heard from others, the environment remains mixed and continues to reflect pressure across income segments. At the low end, shoppers are clearly stretched, putting fewer items in the basket each trip and prioritizing essentials while visiting more frequently as they manage their cash flow. Middle-income households, which have been relatively resilient, are showing some signs of softening with increased price sensitivity and trade-down behavior emerging in certain categories. At the high end, spending patterns remain largely stable, but even these customers are becoming more conscious of price and value, reflecting a broader shift towards cautious discretionary spending.”
  • Dollar Tree ($19.2B, Consumer Staples Distribution & Retail): “At the same time higher-income households are trading into Dollar Tree, lower-income households are depending on us more than ever.The average spend for lower-income households grew more than twice as fast in FQ3 as the average spend for higher-income households. While part of this reflects the fact that higher-income households are typically earlier in their customer lifecycle with us, the data clearly shows that our core customer remains loyal and deeply engaged.“
  • Winnebago ($0.9B, Automobiles): “I don’t think the consumer has stabilized quite yet from an affordability perspective. There’s a lot of chatter in the financial media and many industries about consumer affordability, particularly of discretionary higher priced items.”
  • Conagra Brands ($8.8B, Food Products): “Consumer sentiment remained fairly weak in FQ2. Household budgets continued to be strained and value-seeking behavior persisted, with these pressures weighing most heavily on low- and middle-income consumers.”
  • Lululemon ($21.1B, Textiles, Apparel & Luxury Goods): “I’ve talked about the uncertain behavior of the consumer we’re seeing…they’re definitely looking for ways in which they can save and value.And it’s behavior we’ve seen throughout the year and continued into FQ3.”
  • General Mills ($26.9B, Food Products): “In general, we’re continuing to see consumer weakness, particularly for those making under $100,000 a year.So those in the middle- and lower-income range, we continue to see that consumer being stressed, even as consumers in the higher end of the range are faring a lot better with the current stock market.“

Executives Highlight Accelerating Efficiency Gains, Growth, and Margin Expansion as AI Becomes a Core, Enterprise-wide Productivity Engine

  • FedEx ($55.6B, Air Freight & Logistics): ”We recently launched a global AI program to help our teams innovate faster, serve customers better, and solve challenges more effectively than ever before.Importantly, we are customizing the curriculum to be directly relevant to each team member’s specific role, experience level, and existing AI fluency. We also continued to explore new approaches that leverage our real-world operational data platform. We’re actively pursuing opportunities to bring digital solutions to the market, starting with logistics intelligence insights.”
  • Albertsons ($9.7B, Consumer Staples Distribution & Retail): “We’re building a future where every decision is smarter, every process is more efficient, and every interaction is more seamless. Digital customer experience is a critical pillar of our growth strategy. By leveraging AI, we’re creating differentiated experiences that go beyond convenience. They increase basket size, drive repeat trips, and deepen loyalty. Early results are compelling. Our Ask AI search capability is already delivering a 10% increase in basket size for those customers using it, signaling a meaningful revenue upside as adoption scales. By embedding [tech and AI initiatives] across our business, we will unlock structural cost advantages, accelerate speed to market, and create new profit pools. We’re turning technology into a growth engine, improving margins, deepening customer loyalty, and positioning us to win.”
  • Wiley ($2.2B, Media): “We’ve established an AI center of excellence to automate manual processes and fundamentally change how we work. We’re deploying AI agents, building an active user community and delivering measurable productivity gains.A clear example is our customer service transformation in partnership with Salesforce, where we’re seeing meaningful efficiency improvements. These efforts are ongoing and will continue to drive margin improvement as we scale them across the organization.”
  • Paychex ($45.6B, Professional Services): “I don’t know, whatever AI was called before it was AI, [but] we’ve been doing that. Certainly, the revolution that’s occurring and the speed of the advancement as we’re getting our hands on these tools, we’ve now deployed AI to every one of our 19,000 employees, and we have a process by which we’re encouraging them to build their own AI models to help them each and every day. I think we’re just scratching the surface of what the potential is.”
  • Micron Technology ($187.8B, Semiconductors & Semiconductor Equipment): “Today, over 80% of our professional workforce actively uses GenAI, with total usage up tenfold since last year. In manufacturing, integrating AI into yield and quality management has cut root cause identification time by half in cases. Our coding teams are realizing productivity gains of 30% or more using agentic AI. Across business functions, GenAI is broadening automation opportunities, and we are deploying conversational analytics to accelerate and improve decision-making.”
  • Conagra Brands ($8.8B, Food Products): “Let me introduce a new initiative, Project Catalyst, a multi-year comprehensive effort to leverage AI, data and other new technologies to unlock significant value across our organization. We’re reimagining ways of working, transforming end-to-end processes, and connecting our people with cutting-edge technology in ways that will drive efficiency and effectiveness. You’ll hear more from us about this initiative in calendar 2026, including specific targets for the value we expect Project Catalyst to unlock.”

Mixed Trends, with Europe and North America Showing Relative Resilience, Asia Split Between Strength in Select Markets and Continued Caution in China; LatAm Remains Uneven but Offers Pockets of Growth 

  • Donaldson ($9.5B, Machinery): “The most consistent region right now is Europe. Europe continues to strengthen a bit. We saw that within the quarter from Q4 last year to Q1 this year. U.S., we’re seeing a bit more careful within Q1 of this year, but still on solid foundation. We’re being very careful across Latin America. It’s got some highs and lows. It’s really pretty uneven across Latin America. Asia Pacific is doing okay. We had a nice quarter in China based upon the wins that we have and the share gains that we continue to have in China, but we’re trying to be very careful on China. We’ve had two up quarters in a row, but we’re still not really ready to call it economic recovery or green shoots. We’d really prefer to see more data points.”
  • Enerpac Tool Group ($2.2B, Machinery): “Revenue in EMEA, the region we previously described as a wild card for fiscal 2026, given the underlying economic conditions, declined 10%. In EMEA, product revenue grew 5%, with continued strength from infrastructure and government spending, and a solid performance in Southern Europe. Political uncertainty in Southeast Asia and a slowdown in China was a drag on our performance. Nonetheless, with continued strength in India, recovery in Australia, and an excellent HLT funnel, we expect the APAC region to resume YoY growth in Q2 and for the full fiscal year.”
  • Synopsys ($91.6B, Software): “We expect the environment to remain challenging in China. That’s why when we look at FY 2026 compared to 2025, what we are taking into account in our forecast and guide is truly pragmatic, balanced view. We’re not assuming that the environment is going to change in the next one or two quarters to the positive. We continue on de-risking it in our guide for FY 2026.”
  • Photronics ($1.4B, Semiconductors & Semiconductor Equipment): “As most people are aware that in China, due to the geopolitical issue, they do have some Made in China policy. So, there are quite a few new local mask policies in China. However, Photronics is a market and technology leader in China. We try to differentiate ourselves from our local competitors.”
  • Lamb Weston ($8.1B, Food Products): “Some of the mix shifts in our international markets, that is driven by strength that we are seeing in China as well as APAC. When you look at Europe, there’s been a really strong crop and it’s resulted in lower cost, and that’s on the backdrop of more depressed traffic in those markets. When you look around the globe, there has been some added capacity in some of those developing markets, and that is putting more pressure on exports out of Europe into some of those markets, which has challenged the price a little bit. Argentina and Latin America are [also] strong areas [with] high growth rates.”
  • Hormel Foods ($13.6B, Food Products): “Our China business was the biggest contributor to the International segment’s top line performance in fiscal 2025, and it achieved strong bottom line performance as well. Our branded export business saw a strong top line performance though commodity input costs and trade disruptions weighed on profits. The Brazil market was challenged for us this year and negatively impacted the International segment’s ability to deliver on our growth objectives.”
  • Costco ($410.2B, Consumer Staples Distribution & Retail): “We see some good growth in Europe, especially in Spain, in the UK. We continue to see very, very good strength in Asia. We’ve been about 50/50, half of the expansion in the U.S. and half outside of the U.S., and now we’re seeing even more opportunities in Canada and North America and Mexico.”

In Closing

Recent earnings commentary reflects management teams navigating a challenging operating environment marked by pressured consumers, uneven demand, and continued macro uncertainty. Across sectors, companies emphasized disciplined cost management, supply-chain optimization, and selective pricing actions to protect margins, while several noted that the government shutdown created temporary headwinds.

At the same time, management teams increasingly highlighted the role of technology, particularly AI, in driving measurable efficiency, productivity gains, and tangible cost and margin benefits. Rather than positioning AI as a long-term aspiration, executives frequently described it as an active tool being used today to offset macro and demand pressures.

Looking ahead, corporate outlooks remain cautious, with companies balancing ongoing consumer sensitivity and uneven global conditions against expectations for gradual improvement as inflation moderates, labor markets remain stable, and interest rates ease. Companies are maintaining flexibility and operational discipline while leveraging scale and technology to navigate volatility and position for improvement over time.

As noted above, keep an eye out for our Q4’25 Inside The Buy-Side® Earnings Primer®, which we will publish next Thursday, January 15th.

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