Q3 2025 earnings preview: High hopes vs. stretched valuations

• High-stakes earnings: Q3 earnings need to justify lofty valuations.
• AI Return on Investment (ROI): Future stock gains for Big Tech depend on showing clear proof that massive AI infrastructure spending is translating into revenue growth.
• Zero tolerance for misses: The market has minimal margin for error; even strong absolute results, like NVIDIA's Q2 revenue, can be punished for minor misses in key growth areas.

The start of the US earnings season is a crucial moment for equity markets, as company profits must prove that their high stock prices are justified.

Analysts are expecting strong results, which would mark the ninth consecutive quarter of growth for the S&P 500 index. This growth could be mainly driven by outstanding performance in the Technology and Financials sectors. However, this optimism hides a fragile situation.1

Market participants are dealing with a somewhat ‘uneven economy’ where mega-cap companies drive aggregate growth while consumer-facing sectors struggle. Furthermore, the S&P 500’s forward Price-to-Earnings (P/E) ratio remains substantially elevated.

Given that expectations are so high and valuations are stretched, market participants may have zero tolerance for disappointment. Any company that reports poor results or offers a cautious future forecast is likely to be severely punished, while those with good news may see disproportionately huge stock gains.

An example of how little tolerance investors are likely to have, was on display during the Q2 earnings season. Let us take a look at the following case study.

The NVIDIA earnings report for the second quarter of its fiscal year 2026 serves as a perfect case study for this dynamic. The company reported revenue of $46.7 billion, a stellar 56% increase from the prior year. Despite this exceptional headline number, the stock experienced a 3% drop in after-hours trading.

The reason for the drop was not a disappointing overall result, but a minor miss on expectations for its AI-centric data centre revenue, a key segment analysts are scrutinising for continued growth. The year-over-year growth in this segment decelerated, and the market punished the stock for this perceived slowdown, even though the company’s absolute performance was outstanding. This demonstrates a key principle of modern markets: a strong absolute performance is no longer sufficient if it fails to meet the impossibly high standard set by analyst expectations, particularly in a high-growth sector.

Nvidia daily chart:

The overall season is expected to be highly volatile and unpredictable, with an unusually high bar set for Q3 earnings.

Let us break it down further by looking at the ‘magnificent 7’ stocks and the key metrics that need to be monitored heading into earnings season.

Market direction this quarter will be determined largely by the performance and commentary from the Information Technology and Financials sectors, which are expected to perform the "heavy lifting" for aggregate earnings growth.

The technology sector, including the Magnificent Seven cohort, is projected to be the primary engine of growth, with expected EPS expansion exceeding 20.9% (per LSEG data). This surge is attributed primarily to the ongoing AI arms race.

NVIDIA (NVDA): The central AI proxy

NVIDIA remains the most critical barometer for the health of the entire AI infrastructure boom. It holds the largest weighting in both the Nasdaq 100 (14%) and the S&P 500 (7.5%). As the central supplier of AI processing units, its guidance acts as a direct forecast for the industry’s immediate future.

For Q3 2025, investors will primarily focus on sustained, rapid expansion in data centre revenue. The segment reported a robust 17% sequential growth in Q2 2025. The company is expected to meet or surpass the consensus adjusted EPS target of $1.24 on quarterly revenues of $54.7 billion for its fiscal Q3 2026 (calendar Q3 2025). Given the elevated expectations, the risk profile is acute.

Options trading implies a potential price move of around 6.2% following the release. This highlights the minimal margin for error and the enormous concentration of industry expectations placed upon this single entity.

NVIDIA (NVDA) Q3 earnings will be released on November 19, 2025, after the US market closes.

Apple (AAPL): The AI-mandated upgrade catalyst

Apple's recent performance has been cited as sluggish, with its Q3 guidance predicting only a modest 5% overall revenue growth, boosted by its services division, but held back by slow iPhone sales.

To reignite growth, the company is banking on its new "Apple Intelligence" generative AI features, which are strategically designed to require an upgrade to the upcoming iPhone 16 lineup.

For Apple to secure its projected stronger growth path for fiscal year 2025, investors will be watching the Q3 management commentary closely for confirmation of positive customer reception to the new AI features and effective inventory management.

Apple (AAPL) Q3 earnings will be released on Thursday, October 30, 2025, after the US market closes.

Microsoft, Amazon, Alphabet, and Meta Platforms (hyperscalers and ad-tech)

Major tech companies like Microsoft, Amazon, and Alphabet (the "hyperscalers") must show that their cloud computing businesses (Azure, AWS, and GCP) are still growing strongly, with investors looking for proof of high usage rates, growing service backlogs, and major AI-related contract wins.

Microsoft specifically needs to explain the financial impact of its massive infrastructure spending commitments, particularly with OpenAI.

Meanwhile, Meta Platforms faces pressure to justify its huge spending plan for 2025 (up to $72 billion); this investment must primarily translate into improved, more profitable results for its core advertising business through better AI, while also easing investor concerns about the high cash burn from its Reality Labs (metaverse) division.

Microsoft (MSFT), Meta Platforms (META), and Alphabet (GOOGL) Q3 earnings are all scheduled for release on October 29, 2025, after the US market closes.

Amazon (AMZN), on the other hand, will release Q3 earnings on October 30, 2025, after the US market closes.

Finally, Broadcom will be judged on the success of its custom AI chip business and its ability to profit from the massive demand for networking equipment driven by the hyperscalers' investments.

Q3 numbers arrive amid stubborn cost pressure and a shaky economy; therefore, investors may push aside the raw sales total, asking themselves if the profit margin can truly hold and if the company can maintain strategic discipline.

Inflation, tariffs, and the margin defence

Companies previously dealt with rising costs by simply raising their prices. However, they now risk losing "value-conscious" customers who are tired of high prices. This means that running their businesses very efficiently is critical.

A huge uncertainty is the cost-effect of geopolitical tensions, particularly the threatened "massive increase" in tariffs on Chinese imports. If these tariffs create inflation that lasts for a long time, it complicates the Federal Reserve's decisions and stops stock valuations (P/E multiples) from growing, which would drag down company profits well into 2026.

The data void and policy influence

The ongoing US government shutdown is forcing financial markets to rely on company reports for vital economic clues.

Because the shutdown has stopped the release of critical government data, like inflation and jobs reports, markets are now highly dependent on what companies say about their future. This gives a huge advantage to businesses that can offer a confident, "coherent story" about their plans and ability to maintain pricing power, regardless of whether Q3 financial specifics are spectacular.

Despite signs that the economy is cooling, like the Atlanta Fed tracking third-quarter growth closer to 3.1% to 3.8% and signs of stress on lower-income consumers, analysts strangely raised their overall profit forecasts for the S&P 500 during the last quarter according to FactSet Research.2

This is unusual, as forecasts typically fall. This counter-trend optimism suggests that growth expectations are strongly concentrated in a few high-performing areas (like AI and big tech), potentially hiding a bigger, underlying weakness in the wider US economy. This structural dependence on positive corporate outlooks means the current earnings season will likely be a high-stakes test.

The third-quarter earnings for the "magnificent seven" companies are extremely important because their stock prices are very high right now, based on years of big spending and high hopes for the future.

Since these companies are already valued so highly (they have very high P/E ratios) and the initial infrastructure for AI is mostly built, their future stock gains must come from real growth in profit (earnings), not just from investors paying more for the same level of earnings.

Basically, the market needs to see clear proof that their AI investments are actually paying off in the form of faster cloud revenue growth and stable profit margins. If they don't show a strong Return on Investment (ROI), significant volatility may be ahead, which could weigh on overall sentiment.

Footnotes:

1-,2- https://insight.factset.com/sp-500-earnings-season-preview-q3-2025.