Q3 2025 Commentary: Earnings and Labor Revisions

3Q 2025

By Cliff Aque, CFA®

Markets posted solid gains in the third quarter, with all major asset classes advancing on the back of robust corporate earnings. Although tariff-related uncertainty led many firms to lower or suspend forward guidance, actual earnings far exceeded expectations. According to S&P Global, analysts projected modest earnings growth of 6–7%, but as earnings surprises continued to roll in, the final results came in between 11–12%. This was led by strength in technology and AI, but demand looked resilient across most industries.

Investor sentiment continues to be buoyed by the transformative potential of AI to boost efficiency, cut costs, and raise profitability. According to a McKinsey & Company survey, 78% of companies are using AI in at least one business function, up from 20% in 2017. As adoption deepens, we expect increased capital investment in infrastructure and technology, laying the groundwork for enhanced cash flow and long-term value creation. This shift is inevitably changing the job market and affecting some entry-level roles, requiring college graduates to adapt as AI implementors. Since generative AI emerged in 2023, unemployment for 20- to 24-year-olds has risen from 5.5% in April 2023 to 9.2% in August 2025.

This leads us to the labor market, which saw substantial downward revisions to the number of new jobs created. The U.S. Bureau of Labor Statistics (BLS) revised job creation downward by 911,000 positions for the April 2024–March 2025 period—the largest annual adjustment on record. Macroeconomic uncertainty has certainly affected companies’ decisions around hiring and capital deployment, with the unemployment rate rising to 4.3%, the highest since 2021. This is quite evident in payroll growth, which slowed to an average of just under 27,000 jobs added over the past four months, while the four months before April averaged almost 113,000.

 

Source: BLS, St. Louis Federal Reserve, BAMG

Given the weakening labor market, the Fed lowered rates in September. However, last week’s government shutdown is expected to delay BLS jobs data as data collection is halted, complicating future Fed rate decisions, especially with inflation still slightly elevated. According to the BLS, core CPI, which excludes food and energy, rose 0.3% year-over-year in August, matching July’s increase. The Fed remains cautious about easing too soon, wary of repeating the inflation rebound seen between 1973 and 1982, when premature rate cuts led to even higher inflation later. Today’s inflation path bears a striking resemblance.

Amid these policy shifts, consumer and business demand remains notably resilient. Retail sales rose 3.9% year-over-year in June 2025, supported by strong household balance sheets and wage growth in key sectors.[1] On the business side, capital expenditures have shown renewed strength, with the Business Roundtable CEO Economic Outlook Index reporting a 12-point increase in investment plans for the next six months.[2] This underlying demand has helped cushion the impact of labor market revisions and supports the case for a gradual policy response from the Fed.

Despite near-term volatility in labor data and inflation concerns, the broader economic outlook remains positive. Corporate earnings continue to surprise to the upside, and transformative technologies like AI are driving innovation and long-term value creation across sectors. The Fed’s proactive stance and the resilience of consumer and business demand provide a solid foundation for continued growth. We remain confident in the strength of the underlying fundamentals and are committed to guiding our clients through this evolving landscape with discipline and foresight.

[1] U.S. Census Bureau

[2] Business Roundtable

 

 

The information herein was obtained from various sources. The information provided is believed to be from reliable sources but no liability is accepted for any inaccuracies or completeness of information provided by third parties. The information in this communication is given as of the date indicated and believed to be reliable. BAMG assumes no obligation to update this information, or to advise on further developments relating to it.   This is for information purposes and should not be construed as an investment recommendation.  Past performance is no guarantee of future performance. 

Disclosure:

The information herein was obtained from various sources. The information provided is believed to be from reliable sources but no liability is accepted for any inaccuracies or completeness of information provided by third parties. The information in this communication is given as of the date indicated and believed to be reliable. BAMG assumes no obligation to update this information, or to advise on further developments relating to it. This is for information purposes and should not be construed as an investment recommendation. Past performance is no guarantee of future performance.