With companies like Costco (FY2025 Q3) and AutoZone reporting quarterly results through May, the U.S. stock market is entering the early

phase of the Q2 (April–June) earnings season. Against this backdrop, although some firms have delivered strong performances, the broader

trend of slowing earnings growth has become the market’s primary focus.

Amid ongoing pressure from elevated interest rates, fluctuating trade policies, and a divergent consumption landscape, investors need to

reassess risk pricing and sector rotation—especially given that current valuations remain relatively high by historical standards.

Retail Giants Show Resilience

In an overall conservative consumer environment, Costco’s performance has exceeded expectations. For the third fiscal quarter of 2025

(ended May 11), the company reported revenue growth of 8.0% year-over-year to $61.96 billion; net profit increased 13.2% year-over-year

to $1.9 billion, with diluted earnings per share reaching $4.28—all substantially beating market consensus.

Source: Costco

Notably, excluding the impact of gasoline prices and currency fluctuations, Costco’s same-store sales grew by 8% this quarter,

demonstrating strong resilience in its core business. The company achieved high single-digit growth in non-food categories, dispelling

widespread market concerns about a contraction in discretionary spending. This reflects Costco’s membership-driven, highly sticky

business model and the stronger purchasing power of its affluent customer base. In contrast, Target and Walmart have faced greater

pressure on discretionary sales.

Additionally, Costco highlighted that approximately 75% of its U.S. merchandise sales are sourced domestically, limiting the impact of tariffs.

Against the backdrop of the Trump administration’s “reciprocal tariffs” policy, which pushes for higher tariffs on trade partners, Costco’s

local supply chain advantage has established a protective moat against potential trade shocks.

Earnings Growth Slows Down

Overall, earnings growth expectations for S&P 500 constituent companies in Q2 2025 have clearly decelerated. According to the latest data,

analysts currently forecast aggregate earnings growth of only about 5.4% year-over-year for the quarter, significantly down from 12% in Q1;

revenue growth has also slowed from 4.7% to 3.7%.

Year-to-date trends indicate continued downward revisions to earnings estimates, with 15 out of 16 sectors tracked by Zacks seeing declines

in profit forecasts—aviation and aerospace being the sole exception.

Historically, this transition from high growth to mid-single-digit expansion is often accompanied by valuation pressures and shifts in market

style.

Within this context, the technology sector, particularly AI-related stocks, remains a core pillar of the current bull market. Although some

companies have experienced earnings downgrades since the start of the year, the overall trend has stabilized. Industry leaders such as

Nvidia, Microsoft, and Meta continue to maintain a steady pace in capital expenditures, product innovation, and global deployment,

prompting analysts to reassess their earnings resilience.

Notably, the generative AI-driven surge in data center investments is far from over. Both Microsoft and Amazon have indicated in their

earnings reports that capital expenditures will increase significantly in 2025 to support enterprise-level AI deployments. While short-term

gross margins may face pressure, long-term revenue leverage remains robust.

It is also important to highlight the technology sector’s sensitivity to policy changes. Earlier, the Biden administration imposed restrictions on

AI chip exports and limited China’s access to advanced process technologies, raising market concerns about the growth trajectories of

companies like Nvidia. However, earnings results and updated analyst forecasts suggest that the market has gradually priced in these policy

risks and their potential negative impact on profit outlooks.

Awaiting Policy Clarity

Since April, the Trump administration’s announcement of reciprocal tariff policies has intensified market concerns over escalating trade

conflicts and triggered analyst downgrades of earnings forecasts for certain sectors. Although these measures have yet to be formally

implemented, the market has begun repricing medium- to long-term risks, particularly given the global manufacturing supply chain’s heavy

reliance on China.

However, the marginal impact of tariff risks has recently eased. Details of the Trump tariffs remain unclear, and trade negotiations are

ongoing, with the market generally expecting that the final tariffs will take time before coming into effect. Meanwhile, the Federal Reserve

has not finalized its path for interest rate cuts, and amid the policy “lag” uncertainty, companies and analysts are leaning toward cautious

adjustments rather than significant downward revisions of full-year earnings.

This has provided the market with some breathing room. Some institutions believe that if the eventual tariff policy’s actual impact proves

materially less severe than current market fears, a window for sentiment recovery could open.

This contrasts with the sharp market reaction to “tariff restructuring” earlier in 2025, when many multinationals urgently adjusted inventory

and procurement plans, pressuring short-term profits. Currently, market focus has shifted toward the timing and scale of actual policy

implementation in the second half of the year, repricing medium-term risks accordingly.

Q1 Review

Although the Q1 earnings season is not yet fully complete, as of the end of May, 490 S&P 500 constituent companies—representing nearly

98% of the index—have reported results. Overall, corporate earnings grew 11.9% year-over-year, with revenue up 4.8%, both surpassing

prior market expectations.

However, looking at the beat rates, only 74.1% of companies exceeded EPS estimates, below the five-year quarterly average of 78.4%. The

revenue beat rate was 63.3%, also trailing the five-year average of 71.2%.

This pattern suggests that while most companies continue to grow amid challenges, the rising valuation levels and investor expectations

are making it increasingly difficult for firms to surpass market forecasts, contributing to a more cautious market sentiment toward upcoming

earnings cycles.

The End

As Wall Street giants such as JPMorgan Chase, Citigroup, and Wells Fargo report their Q2 earnings in mid-July, the core phase of the

earnings season will fully unfold. Key focus areas will include whether tech leaders can maintain their solid momentum, how consumer

goods companies respond to tariff outlooks, and signals from the Federal Reserve alongside inflation trajectories.

The market is currently priced at a critical inflection point: expectations for Fed rate cuts persist, and liquidity improvement remains

anticipated. Meanwhile, corporate earnings are transitioning from “above-expectation high growth” to “moderate growth.”

Amid the dual pressures of earnings and valuation in mid-2025, companies with truly predictable performance, reasonable valuations, and

strong defensive qualities may deliver outsized returns.