Bank of America Q4 Earnings Tracker: Resilient Earnings, Weaker Beat Rates, and AI Capex Dominance

As the fourth-quarter earnings season progresses, trends indicate that corporate earnings remain resilient, albeit with signs of softening. According to Bank of America’s latest earnings tracker, 307 companies, representing 76% of the S&P 500’s total earnings, have reported so far. While aggregate earnings per share (EPS) results have exceeded consensus estimates by 4%, this is down from the 5% beat rate seen through Week 3. Year-over-year (YoY) growth remains strong at 12%, but the proportion of companies surpassing EPS estimates has dropped to 67% from last week’s 71%, though it remains well above the historical average of 59%.

Revenue beats have also declined, with only 59% of companies exceeding forecasts, down from 63% in the previous week. Meanwhile, companies delivering both EPS and revenue beats have fallen to 47%, compared to 51% last week. Despite these declining beat rates, earnings growth remains on track, though forward-looking indicators suggest potential challenges ahead.

Stock Market Reaction: Muted Gains Despite High Volatility

Stock price reactions to earnings reports continue to be sharp, with an average next-day move of 4.8%—well above the historical 3.9% average. However, the market is showing a weaker response to earnings beats, with "beat alpha"—the outperformance of companies that beat estimates—shrinking to just 73 basis points (bps), far below the historical average of 147 bps.

Additionally, only 50% of companies that exceeded EPS expectations have outperformed the S&P 500 the day after reporting, a stark contrast to the 64% seen last quarter. This suggests that while earnings are coming in strong, investors remain cautious about forward growth prospects. A notable example is the reaction to mega-cap tech stocks—Meta (META) was the only major hyperscaler to see a post-earnings gain, reflecting lingering concerns over AI monetization and rising capital expenditures.

Industry Trends: AI Capex Growth Surges, Broader Capex Remains Weak

The artificial intelligence (AI) investment boom remains a dominant theme in earnings discussions. Year-to-date, capital expenditure (capex) estimates for the major hyperscalers—Microsoft (MSFT), Meta (META), Amazon (AMZN), and Alphabet (GOOGL)—have risen by $34 billion, pushing total expected spend to $290 billion, representing a 34% YoY increase. AI-driven spending remains robust as companies aggressively invest in data center expansion and infrastructure.

However, outside of AI and the “Magnificent Seven,” corporate capital spending is significantly more restrained. Non-AI-related capex for the broader S&P 500 is growing at just 3% YoY, in stark contrast to the index-wide 23% capex increase seen last year. Companies are exercising caution amid rising geopolitical risks, particularly in the semiconductor sector, where supply chain concerns and potential trade restrictions are driving conservative investment strategies.

Corporate Sentiment & Forward Guidance: Optimistic Tone, But Caution Lingers

Despite declining beat rates, corporate sentiment remains strong, with Natural Language Processing (NLP) analysis showing sentiment at record highs. This suggests that management teams remain confident in their ability to drive earnings growth. However, concerns are beginning to emerge, particularly around demand softness. Mentions of “weak demand” have started to rise again, especially among small-cap companies, where sentiment is now at record lows.

Forward guidance has also been weak, reinforcing concerns of potential earnings deceleration. The guidance ratio—measuring above- vs. below-consensus forecasts—stands at just 0.39x, significantly below the historical January-February median of 0.48x. This suggests that companies are exercising caution in setting expectations for the coming quarters.

Sector-Specific Trends: Financials and Tech Lead, Energy and Industrials Lag

Earnings growth has varied widely across sectors. Financials are leading the way with a 26% YoY EPS increase, followed closely by Technology at 16.6%. The strength in financials has been driven by strong net interest income and resilient trading revenues, while technology’s gains are largely fueled by AI-related investment and demand for cloud services.

On the other hand, the energy sector is struggling, with EPS down 28.9%, reflecting lower commodity prices and weaker refining margins. Industrials are also under pressure, posting a 9% YoY earnings decline as slowing global demand weighs on order volumes. Consumer discretionary stocks, while showing impressive 22.8% EPS growth, have seen more modest sales growth of just 5.8%, indicating that earnings expansion is being driven more by cost efficiencies than top-line demand.

Macroeconomic & Market Risks: Tariffs and AI Uncertainties Loom

Potential tariff increases could become a significant earnings headwind in 2025. The prospect of 25% tariffs on Canada and Mexico, along with an additional 10% levy on Chinese imports, has the potential to reduce S&P 500 earnings by up to 8%, depending on how much of the cost burden is passed on to consumers.

Meanwhile, the AI sector is facing new uncertainties. The recent breakthrough in AI capabilities from DeepSeek has sparked concerns over semiconductor pricing power, raising questions about long-term profitability for chipmakers. Additionally, while AI capex remains strong, the costs of these investments could weigh on hyperscaler margins. Current estimates suggest that higher AI-related spending could reduce hyperscaler EBIT margins by 160bps by 2026.

Key Takeaways: A Resilient Earnings Season With Rising Caution

As Q4 earnings season nears its conclusion, corporate results remain largely resilient, but signs of softness are beginning to appear. Beat rates are declining, and stock price reactions are more muted than in previous quarters, suggesting that investors are pricing in a more challenging earnings environment ahead.

AI capex remains the key driver of corporate investment, but questions about monetization and profitability are weighing on sentiment. Meanwhile, broader corporate spending remains constrained due to geopolitical and economic uncertainties.

Guidance trends indicate that earnings momentum may slow in the coming quarters, and macroeconomic risks, including potential tariffs and geopolitical tensions, could further challenge corporate profitability. While earnings remain solid for now, the outlook for 2025 appears increasingly complex, with markets adjusting to a more cautious stance.