Earnings Diverge as Mega-Caps Lead, Real Economy Lags

Analyst Weekly, August 4, 2025

Big Tech feasts, the rest nibble. Microsoft and Meta crushed Q2 earnings, but half of S&P 500 companies reported margin declines. While investors cheer AI-fueled growth, the real economy’s showing signs of a tariff hangover and rising cost headaches.

Earnings Season: Strength at the Top, Stress in Certain Pockets

The latest earnings season has underscored a widening divide in US equity markets. At the top, tech giants and big banks have posted strong results. Microsoft, Meta, JPMorgan, and Goldman Sachs all delivered double-digit profit growth, reinforcing a perception of resilience in key segments of the index.

Beneath these headline beats, however, the story is more nuanced. Recent weeks have brought tariff-related volatility, a weaker-than-expected jobs report, and softer earnings across consumer and cyclical sectors. Companies like Ford and GM reported losses tied directly to tariff costs. Materials and industrial firms also warned of margin compression. Oil majors Chevron and Exxon saw profits decline 31% and 23%, respectively, even as they maintained buybacks and dividends.

Across the S&P 500, revenue growth remains positive, but profits are under strain, especially in sectors tied to the real economy such as energy, materials, and industrials. Eight of eleven sectors reported year-over-year declines in net profit margins in Q2 2025. Despite this broad trailing weakness, index-level earnings forecasts remain unfiltered, thanks to strong margin performance in technology, financial, and communication services.

What we’re seeing then, is not uniformly broad-based strength, but rather a market where strong performance from a small number of mega-cap stocks continues to shape the headline narrative, effectively muting the underlying softness in more cyclically sensitive parts of the economy.

Source: Bloomberg, as of July 31, 2025.

Why the S&P 500’s Valuation Doesn’t Tell the Whole Story

Despite signs of weakness across large parts of the index, the S&P 500 continues to trade at ~22–24x forward earnings. Growth-oriented stocks trade near 32x, while value names remain closer to 18x, highlighting a widening disconnect in how future earnings are being valued. This is due to the outperformance of a narrow set of highly capitalized, tech-driven firms whose leadership now disproportionately shapes index-level valuations.

This concentration is visible in sector weights too. NVIDIA alone now accounts for 7.7% of the index, on its way to equaling the entire healthcare sector at 9.0%. Traditional defensive sectors such as utilities (2.4%), staples (6.0%), and healthcare (9.0%) have fallen to their lowest combined index share (17.4%) in over two decades.

Traditionally, investors turned to these defensive equity sectors as well as long-duration Treasuries to hedge downside risks. But with defensive sectors out-weighed by Mag 7 names and bonds still underwater nearly 10 months after the first rate cut, these hedges have proven ineffective.

As a result, investor interest has shifted toward more consistent downside protection and valuation support, including:

Real assets, commodities and infrastructure plays
Uncorrelated diversifiers, including digital assets and gold
Multi-asset income strategies
Regional and international value plays

Across both theUS and international markets, there are pockets of companies trading at 6–10x normalized earnings, often with balance sheet strength and free cash flow yields well above market averages. In sectors like energy, regional banking, and industrial manufacturing, valuations have compressed despite stable or improving operational performance. Many of these businesses are priced near or below book value, with dividend coverage supported by operating cash flows rather than growth projections.

In a market increasingly driven by momentum and concentrated growth narratives, these overlooked segments offer a more grounded path, not necessarily as contrarian bets, but as part of a more balanced, valuation-aware approach to portfolio construction.

Source: Bloomberg, as of August 3, 2025.

Conclusion: Recalibrating Valuation Awareness

The S&P 500’s strength is being driven by a small group of sectors, mainly tech and financials, boosted by AI-related spending and investment. But under the surface, many parts of the real economy, like autos, airlines, and consumer goods, are seeing shrinking margins, and more uncertain earnings. In this context, the index’s headline multiple no longer reflects the average underlying business.

For investors reconsidering how they build their portfolios, it may make sense to focus on strategies that are diversified, valuation-aware, and grounded in fundamentals like steady earnings, solid balance sheets, and the ability to hold up in tougher conditions.

Comeback of the Greenback?

The U.S. Dollar Index ended last week with a gain of 1.0%, closing at 96.68. At its peak during the week, the dollar was up as much as 2.6%. However, Friday’s long red candlestick, in the form of a bearish engulfing pattern, indicates that traders have recently pulled back from the dollar in the short term.

In the medium term, the breakout above the June 23 high at 98.96 may have marked the beginning of a new upward trend. If the rally continues, the lower highs from this year’s previous downtrend could serve as potential upside targets: 100.05 and 101.52. Further above, the long-term 200-day moving average is located at 102.91.

The 50-day moving average could act as key support in case of a deeper pullback. On the other hand, a decisive break below it could bring the recent low at 96.67 and the July low at 95.91 back into focus.

U.S. Dollar Index in the daily chart

Key Week for German Q2 Earnings

Infineon: A semiconductor manufacturer playing a key role in the energy transition, digitalization, and e-mobility. However, competition is intense. Market leader TSMC, the producer of Nvidia chips, is followed by U.S. giants such as Broadcom, AMD, and Qualcomm, as well as European heavyweights like ASML. Infineon remains heavily dependent on the automotive sector. With regard to U.S. tariffs, it will be particularly interesting to see on Tuesday how the company plans to strategically position itself going forward. The stock extended its losses by 1.8% last week and is currently in a correction phase.

Siemens Energy: Global energy demand is expected to rise significantly in the coming years due to e-mobility and the AI boom. Siemens Energy is well positioned to play a key role here. Strategically, the company holds critical technologies needed to support the technical side of the energy transition. Investors should watch closely on Wednesday how Siemens Energy manages its projects in the U.S. The company plans to start producing large industrial power transformers in the U.S. by 2027. Siemens Energy is the third-best DAX performer year-to-date, with the share price nearly doubling. Just last week, it reached a new record high.

Rheinmetall: Rheinmetall is significantly more highly valued than most of its defense-sector peers. This increases the pressure to deliver strong earnings. In addition, the recent trade deal between the U.S. and the EU could disadvantage European defense companies, as billions in EU defense budgets are expected to shift toward U.S. products. Despite these risks, the defense boom remains intact. Structural demand continues to support the industry. On Thursday, investors should focus in particular on Rheinmetall’s strategic direction, order intake, and any guidance revisions. The stock is currently holding above a key support level.

Rheinmetall in the weekly chart