Closing the Quarter – Q3’25
Closing the Quarter – Q3’25
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In today’s thought leadership, we cover:
- Key Events this week
- Closing the Quarter Summary – Q3’25 earnings performance, guidance moves and consensus shifts, AI, layoffs, consumer sentiment, and capital allocation
Key Events
U.S. Government Shutdown
- President Trump signed a spending bill into law Wednesday night, ending the longest government shutdown in U.S. history. Federal employees were expected to return to work on Thursday, though it will likely take weeks for operations to fully normalize. Additionally, the Bureau of Labor Statistics will need time to resume its standard release schedule for economic data; the White House has already indicated that the October jobs report and CPI release will likely not be published. (Source: Bloomberg)
NFIB Small Business Optimism Index
- The NFIB Small Business Optimism Index declined to 98.2 in October, down 0.6 points from September. The Uncertainty Index fell 12 points to 88.0, marking its lowest level of the year. According to NFIB Chief Economist Bill Dunkelberg, “Optimism among small businesses declined slightly in October as owners report lower sales and reduced profits.” He added that “many firms continue to face labor shortages and are looking to hire but are struggling to find qualified workers, with labor quality remaining the top concern for Main Street.” (Source: NFIB)
ADP Payroll
- ADP data show that private-sector payrolls declined by an average of roughly 11,000 jobs per week over the four weeks ending October 25. This trend contrasts with ADP’s headline October estimate of 42,000 job gains, indicating that hiring momentum weakened toward the end of the month. (Source: ADP Pay Insights & Employment Report)
Closing the Quarter Summary
Heading into earnings season, our Q3’25 Inside the Buy-Side® Earnings Primer® survey, published October 9th, revealed continued improvement in investor sentiment and an increased appetite for growth, despite continued cautiousness amid ongoing headwinds. A majority of respondents, 53%, characterized their sentiment as Bullish or Neutral to Bullish, with nearly one-quarter outright Bullish. Nearly half projected 2025 U.S. GDP growth, a sharp increase from expectations entering Q2 (29%), and most reported little concern about the U.S. entering a recession by the end of 2026.
Against this backdrop, investors prioritized growth over margins, 66% to 34%, respectively, marking a notable shift from the 50/50 split observed heading into Q2 and representing the strongest preference for growth since December 2024.
In addition to tariffs, growth/demand remained a top focus area for earnings calls, while investors also set their sights on capital allocation priorities, particularly capex outlooks. What was missing from the perspectives we captured? The labor market.
With Q3’25 earnings largely in the books, we “Close the Quarter” with some notable themes:
1. Q3'25 Earnings Performance
Companies Post Solid Results Relative to Expectations, with Earnings and Revenue Growth Each Exceeding 5-Year Averages; Analysts Forecast Strong Top-line Growth in the Final Quarter of 2025, Albeit a Stepdown from the Q3 Growth Rate
Overall, revenue performance exceeded expectations. The YoY blended aggregate revenue growth rate stands at 8.1%, up from 5.7% estimated at the start of October and significantly above the 4.2% estimate from early July. In addition, 78% of companies reported positive top-line surprises, above the 5-year average of 70%, with results coming in 2.3% above consensus (versus the 5-year average of 2.1%). For Q4, S&P 500 aggregate revenue estimates call for blended top-line growth of 6.6%, still a strong growth rate relative to the last two years, but down from the Q3 rate of 8.1%.
Q3 earnings prints also fared much better than expected. With over 90% of S&P 500 companies reporting earnings to date, the Index is on track to deliver YoY blended1 aggregate earnings growth of 16.8%, nearly double the 8.8% estimated at the start of October. Notably, 83% of companies reported a positive EPS surprise, well above the 5-year average of 78%.
Similar to last quarter’s trend, forward estimates for Q4 have edged up slightly from 7.7% captured at the beginning of October to 8.0% today, supported primarily by upward aggregate revisions in Tech, Financials, and Communications. Conversely, Utilities, Materials, and Consumer Staples saw the most notable downward adjustments in aggregate earnings expectations.
2. Guidance Moves and Consensus Shifts:
Most Companies Raised Annual Revenue and EPS Outlooks, Marking the Highest Proportion of Q3 Raises Since 2021; As for Consensus, Tech, Healthcare, and REITs See the Highest Share of Positive Revisions, while Materials Stand Out as Seeing the Most Downgrades
Guidance Moves
We analyzed annual revenue and EPS guidance trends across the S&P 500.3 Below are our findings.4
Overall, annual Revenue and EPS guides continue to reflect a more optimistic stance, with more companies either Raising or Maintaining forecasts heading into Q4. By comparison, less than one-quarter Lowered annual forecasts across both metrics.
Revenue
More companies, 45% Raised their midpoints relative to last quarter, while 34% Maintained and 21% Lowered. Average spreads narrowed 40 bps to 1.7%.
- 82% of companies expect full-year 2025 results to be above 2024 actuals
- 36% of companies are forecasting annual Revenue guides above consensus
- Among those that Raised Revenue guidance, Communications (60%), Tech (52%), and Healthcare (49%) saw the largest share of increases
- In contrast, Materials – a barometer for the overall economy – saw only 25% of companies Raise Revenue guidance, while 50% Lowered
EPS
A majority of companies, 51%, Raised the midpoint of annual guides relative to last quarter, while 31% Maintained and 18% Lowered. Average EPS spreads decreased from $0.28 to $0.23 on EPS of $8.34 to $8.55
- 82% of companies expect full-year 2025 results to be above 2024 actuals
- 64% of companies are forecasting annual EPS guides above consensus
- Among the 51% that Raised EPS guidance, Tech and Communications again stand out for the large number of increases, 79% and 75%, respectively, while the lion’s share of companies Lowering guides came from REITs (42%), Consumer Staples (35%), and Materials (22%)
Historical Adjustments to Annual Guidance in Q3
Looking at historical trends for the Q3 reporting season across the S&P 500, Q3’25 stands out for its relative optimism, with companies raising Revenue and EPS guidance at the highest proportion since Q3’21.
Revenue
- Raises Above Historical Levels: Revenue outlook Raises captured in Q3’25 register at 58%, up from 37% in 2024 and the highest proportion since Q3’21 when 72% Raised
- Stable Percentage of Companies Maintaining Guidance: Companies Maintaining their Revenue outlooks continues to hover at 30%, largely in line with 33% in both 2024 and 2023
- Fewer Lowering Guidance: Only 12% Lowered guidance, reflecting the solid Q3’25 reporting season
EPS
- More Raised in 2025: 49% of companies have Raised their annual EPS outlooks in Q3’25, up from 41% in Q3’24 and 47% Q3’23, representing the highest proportion observed since Q3’21 when 58% Raised
- Fewer Maintained: 40% of companies Maintained guidance, down from 43% last year
- Fewer Lowering Guidance: 11% of companies Lowered their outlook, down from 16% in Q3’24 but in line with 10% in Q3’23
Consensus Shifts
When reviewing full-year 2025 consensus changes for the S&P 500 from one week before through one week after Q3’25 earnings announcements, analyst revisions show a mixed picture. A majority of companies saw upward adjustments to EPS, while Revenue is split between upward revisions and no change; however, trends vary significantly by sector.
Looking at Revenue, 44% of companies saw estimates Increased, 13% Decreased, and 43% Maintained. Upward revisions were most prominent for Tech (66%), Healthcare (52%), and REITs (50%). Materials, Energy, and Utilities saw the largest share of Decreased estimates, 30%, 25%, and 19%, respectively.
For EPS, 58% of S&P 500 companies saw full-year estimates Increased, compared with 21% either Decreased or Maintained. Upward revisions were concentrated more heavily toward Financials (83%), REITs (76%), and Tech (73%). Meanwhile, Materials, Communications, and Energy saw the largest share of decreased estimates: 50%, 43%, and 35%, respectively.
Combining both metrics, Tech, Healthcare, and REITs stood out as sectors with more companies seeing increases of over 50% for both Revenue and EPS. In contrast, Materials saw a larger proportion of downward revisions across both metrics.
3. Artificial Intelligence
AI Has Moved from Experimental to Enterprise Essential; Companies Highlight AI’s Role in Transforming Operations, Driving Efficiency, and Redefining Competitive Advantage across Industries
This earnings season, companies across sectors have presented AI as a transformative force driving productivity gains and competitive differentiation. Mentions of AI have spiked from just 1,933 in 2020 to 32,570 in 2025, representing a nearly 17x increase. In fact, the number of AI mentions in 2025 alone are more than 2020-2023 mentions combined! The surge began accelerating in 2023, coinciding with the mainstream adoption of generative AI and large language models, and continued sharply through 2024 and 2025 as companies integrated AI into both operations and strategy.
Leaders like IBM and Microsoft describe AI adoption across enterprises as still being in its “first innings” and frame the technology as a “long-term enterprise transformation,” emphasizing its foundational role in reshaping operations, products, and customer experiences. Technology companies underscore massive investments in both infrastructure and talent to meet surging demand for their AI platforms.
Across industries, AI is increasingly positioned no longer as an experimental technology but as a core pillar of business strategy and operational efficiency. Implementation has bifurcated into two major approaches: internal productivity enhancement and commercial product integration. Internally, companies are increasingly using AI to detect, predict, and prevent risks and also report tangible efficiency gains, with AI enabling leaner operations through automation, enhancing decision-making, and optimizing resource allocation to deliver millions in cost savings. Anecdotally, Google noted that nearly half of its new code is now AI-generated, while others are deploying enterprise-wide AI tools and establishing partnerships with OpenAI, Microsoft, AWS, etc. to drive organization-wide productivity.
Consumer-facing companies, such as Wayfair and Target, as well as hotels are leveraging AI service agents, chatbots, agentic AI, and generative AI to help guide users through product comparisons, availability, and dynamic pricing. Tech companies are embedding AI into customer-facing offerings, enabling predictive insights, automation, and real-time decision-making.
As AI becomes more deeply embedded across industries, transparency around how your company is leveraging this technology is no longer optional, but a strategic imperative. Clear, consistent communication of a company’s AI vision, progress, and measurable impact helps investors distinguish between hype and benefit. Companies that effectively articulate their AI journey not only strengthen investor trust but also position themselves as forward-thinking leaders in an increasingly technology-driven business landscape.
Below are recommendations to effectively articulate the role AI is playing at your company:
Communicate the AI Vision: Establish a clear internal and external understanding of what AI means for your company and business.
- Frame AI as a strategic enabler, not a buzzword; define how it enhances productivity, powers innovation, and strengthens competitive advantage
- Anchor this vision in company mission and the long-term growth narrative
- Develop consistent language for describing AI across all communications (earnings calls, investor decks, ESG reports, website, etc.)
Demonstrate Integration Execution: Show disciplined execution and organizational readiness to deliver on your AI vision.
- Outline how and where AI is being implemented (e.g., internal productivity tools, customer-facing applications, R&D investments, etc.)
- Showcase cross-functional integration, such as collaboration between IT and business units and highlight strategic partnerships (e.g., with OpenAI, Microsoft, etc.) to reinforce credibility and scale
Quantify Impact and Articulate the Future Narrative: Investors are looking for tangible, quantifiable outcomes; translate AI initiatives into measurable business value and a credible long-term roadmap.
- Share early examples of impact, illustrating how AI is already improving efficiency, innovation, or decision-making
- Link AI initiatives to key business metrics such as margin improvement, revenue growth, cost efficiency, churn reduction etc.
- Identify KPIs to track (e.g., productivity lift, automation coverage, AI-driven revenue)
- Be transparent about investment levels and ROI timelines, acknowledging that AI payoffs may be gradual but cumulative
- Position AI as a core, durable component of the company’s competitive advantage which is central to future scalability and growth and embed regular AI updates into investor communications
4. Layoffs
This Quarter Has Seen an Acceleration of Workforce Realignment as Companies Restructure around Efficiency, Automation, and AI-driven Transformation; Layoffs are Moving Beyond Transitory Economic Slowdown Cost-cuts
This quarter, layoffs accelerated while hiring remains muted. According to the most recent data from Challenger, Gray & Christmas, U.S. employers announced 153,074 job cuts in October 2025 — the highest monthly total for that month since 2003 — representing a 183% increase from one month prior and a 175% increase from October 2024.5
Cumulatively, by the end of October, layoffs had reached 1,099,500 for the year, marking a 65% increase over the same period in 2024. This strong uptick in job cuts signals a departure from the “low-hire, low-fire” era that characterized the labor market earlier in 2025, when companies were cautious about both hiring and firing.
When looking at layoffs mentions on 2025 earnings calls thus far, Industrials followed by Consumer Discretionary and Tech lead the way, which is in line with our analysis of public companies that have announced layoffs since September. As we noted two weeks ago, a significant dimension to these layoffs involves the advent of AI and the necessity to restructure around efficiency and digital transformation, impacting the white-collar workforce more.
Layoffs are no longer only about transitory economic slowdown cost-cuts, but increasingly about strategic pivots toward automation, AI-enabled roles, and leaner human headcount models. However, companies also cite the uncertain macro, weaker demand, shifting consumer patterns, post-pandemic over-hiring and normalization, and cost-reduction/reorganization programs (such as Verizon’s announcement on Thursday to cut 15,000 jobs, the largest ever for the carrier). While many companies view current cuts as positioning for efficiency and future scalability, the breadth of drivers suggests workforce volatility will persist for some time.
Selected Commentary from Earnings Calls
August 14 – GEE Group ($20.7B, Industrials): “So far in 2025, we have encountered and continue to face very difficult and challenging conditions in the hiring environment for our staffing services. These have stemmed from various factors, including the over-hiring that took place in 2021 and 2022 in the immediate aftermath of the pandemic, and the macroeconomic uncertainty, interest rate volatility, and inflation that followed. These conditions have produced a near universal cooling effect on U.S. employment.”
October 23 – Banc of California ($2.3B, Financial Services): “We’ve been adding…great talent at all levels, but the timing has been more spread out as our teams have figured out ways to drive efficiencies. It has to do with how we monitor and manage BSA, how we’re using co-pilot and ChatGPT, both of which are deployed companywide. And our IT team has done a great job of training people and making sure that we are using tools that can allow us to do things faster. I’ve told our teams, we’re not looking to lay people off, but hiring might be slower because we don’t need as many people as quickly.”
November 5 – Recruit Holdings ($74.9B, Services): “The decline in the labor supply in the U.S. is already impacting the market. We do not think it will continue declining sharply going forward. That said, it may not show a V-shaped recovery right away. When we say bottom, it is an image of ticking and turning upward. Even when there is a bottom, it does not necessarily mean a rapid recovery.”
5. Consumer
Sentiment has Plunged to Near Historic Lows, as Persistent Inflation and Political Uncertainty Erode Confidence and Purchasing Power; Cautious, Value-driven Consumers are Reshaping Demand across Sectors
U.S. consumer sentiment has taken a sharp turn downward in recent months. The University of Michigan’s Consumer Sentiment Survey Index fell to 50.3 this month, down from 53.6 in October and far below the 71.8 reading in November 2024. The latest reading clocks in among the lowest results recorded in the survey’s decades of history, reading just slightly above the levels we saw amid the historic inflation experienced in 2022 following pandemic spending.
Selected Commentary from Earnings Calls
September 25 – H.B. Fuller Co. ($3.15B, Materials): “We expect volume growth to remain elusive…customer demand is appearing more uneven and less predictable, driven by global trade tensions and export-driven uncertainty. Customers are hesitant to make product changes and incremental investments given economic volatility and high interest rates.”
October 22 – Prog Holdings ($1.12B, Financial Services): “ Looking ahead, we’re closely monitoring the macro environment, especially as consumers face ongoing liquidity constraints and shifting spending behavior.”
October 23 – Deckers Outdoor ($12.36B, Consumer Discretionary): “For the back half, we are anticipating a more cautious consumer as the full impact of tariffs and price increases will be felt here in the U.S.”
October 28 – Whirlpool ($3.76B, Consumer Discretionary): “The macroeconomic uncertainty, marked by elevated interest rates and evolving trade policies, negatively impacted consumer sentiment. In particular, weakness of consumer sentiment not only suppressed demand but also impacted itself, as we continued to see consumers choosing to mix into lower end products.”
November 6 – RPM International ($13.8B, Materials): “We have been through 18 months of really flat or declining consumer takeaway, and consumer sentiment’s not terribly hot right now. There’s no big, huge catalyst that suggests that consumers are running back into the stores and we’re going to get back to the 3% to 4% or better product takeaway from the economy.”
November 7 – Flowers Foods ($2.44B, Consumer Staples): “Consumer sentiment in the third quarter reached the lowest point this year, exacerbated by greater fears about the economy and the job market.”
6. Capital Allocation
Cash Deployment Trends Show a Continued Shift toward Growth as Capex Sees an Increase both QoQ and YoY; M&A sees a Considerable Sequential Rise, while Share Repurchases Pull Back
To garner insights into capital trends, we analyzed the average sector allocations within the S&P 500.6
Debt reduction was more prominent in the first half of the year than this quarter while buybacks continued to see a pullback on a quarterly and annual basis.
Capex Spotlight:
Sector-level analysis of median capex shows increases across all quarters on a QoQ basis, led by some of the most challenged sectors on the top-line: Energy (10%), Consumer Staples (9%), and Materials (8%).
The trends are largely positive YoY, driven by increases in Utilities (21%), Tech (15%), Communication Services (12%), and Financials (11%), with Materials, Energy, and Consumer Discretionary also showing solid YoY increases. Consumer Staples and Health Care were the only sectors to decrease, down 7% and 1% YoY, respectively.
As companies adapt to recent changes in tariffs, trade, and tax reform, the focus on maintaining competitiveness has intensified, driving an uptick in capex spending. A Morgan Stanley analysis shows that capex across industries is projected to increase by an average of 8% in 2025, up notably from 4% in 2024.8
This growth is led by several industries, including Internet Media & Services (+39%), Discretionary Retail (+21%), Gaming, Lodging & Restaurants (+18%), and Utilities Networks (+18%). Apart from Pulp & Paper (–14%), Iron & Steel (–7%), and Chemicals (–1%), most industries are expected to have increased capex in 2025. Many industries increasing capex noted that the additional investment is intended to support and sustain their existing asset bases, while Internet Services and Utilities Power Generation are investing more to fund datacenter buildouts amid the proliferation of AI.
As companies are announcing capex increases to pursue growth, some are expecting near-term margin pressure which can raise concerns regarding the timing of ROI. The messaging needs to frame these moves as strategic, disciplined, and value-accretive rather than just costly. To that end, we advise our clients to deliberately use “investment” versus “spend”.
Below are additional recommendations to keep in mind when communicating capex increases:
Set the Strategic Context and a Multi-year Investment Framework:
- Link increased investment directly to strategic priorities (e.g., innovation, capacity expansion, efficiency, customer growth, etc.)
- Position the investments as proactive, not reactive (e.g., investing from a position of strength to secure future growth)
- Provide a multi-year investment framework which emphasizes near-term investments and acknowledges margin fluctuations; provide a directional timeline of when margin fluctuations are expected to stabilize
Reinforce Confidence in Underlying Fundamentals:
- Highlight favorable market conditions, such as stable demand, pricing power, or operational efficiency to offset temporary compression
- Emphasize balance sheet strength as an enabler to pursue growth and maintain financial flexibility
- Underscore balance and optionality and the ability to adjust investment phasing dynamically based on market conditions or other factors
Use Cohesive Messaging Across Channels and Provide Transparent Updates:
- Ensure consistent messaging across investor materials that reinforce the same investment framework
- Provide transparent updates in line with the timeline provided
In Closing
As we close Q3’25, the corporate and investor landscape reflects a balance of optimism and realism. Earnings broadly exceeded expectations, yet with macro headwinds persisting, sentiment has shifted toward “cautious growth”, one that rewards disciplined execution and clear, transparent communication.
The consumer, the engine of U.S. resilience, has become a growing concern. Persistent inflation, elevated rates, and political uncertainty have driven sentiment to historic lows, eroding purchasing power and confidence. While spending is not collapsing, demand is clearly tilting toward essentials and affordability — a shift that will continue to shape growth and guidance into 2026.
AI remains a defining force of transformation, now embedded as a structural pillar of business strategy and efficiency. Companies are translating AI investment into measurable gains in productivity, cost savings, and innovation. At the same time, the push for automation and efficiency is reshaping workforce structures, with layoffs reflecting a transition toward leaner, technology-enabled models built for scalability.
Looking ahead, rising capex and accelerating M&A signal companies’ intent to invest ahead of strength — positioning for long-term opportunity despite near-term uncertainty. Whether 2026 marks a true inflection point remains to be seen, but momentum toward growth through strategic investment is clearly building.
- Combines actual reported results for companies and estimated results for companies yet to report
- Source: LSEG I/B/E/S (Formerly Refinitiv)
- As of 11/7/25
- Based on company guidance provided at the time of publication; total number of companies differ across revenue and EPS
- Source: Challenger, Gray & Christmas
- As of 11/7/25; “All Sectors” figures are equal weighted sector averages
- Source: EY-Parthenon Deal Barometer
- Source: Morgan Stanley